*Note: This was written by a Yahoo! contributor. Do you have a small business story that you'd like to share? Sign up with the Yahoo! Contributor Network to start publishing your own finance articles.
As an attorney advising small businesses on legal and tax issues, the most common situation I deal with is helping one or more people to start a business. Once the business was started however, one of the more common requests is how to change the business structure.
For example, a client may come to me and wish to start a sole proprietorship. Once their business was up and running, that same client may decide to bring in a partner to run the business with them. At that point, depending on a variety of circumstances, the partners may wish to change their business structure from that of a soul proprietorship to a partnership or corporation.
States very on the paperwork that is required to change or modify a business structure. For example, some states require that the original business be dissolved and a new business be established, whereas others allow for the original business to seamlessly transfer into the new business.
As far as the federal level is concerned however, the IRS requires that a business changing structures request a new employer identification number (EIN) in certain circumstances. The IRS provides a form that can be filled out by a sole proprietorship, partnership, or corporation to request an EIN. Requesting and EIN can also be done online.
Typically, the IRS requires that a new EIN is obtained when a sole proprietorship wishes to transition into a partnership or a corporation. The same holds true if a partnership or corporation wishes to transition into a sole proprietorship, a corporation becomes a partnership, or a partnership becomes a corporation.
In other situations, a new EIN is not required. For example, a client who has a small business organized as a corporation and wishes to change their tax implications and become a S-corporation will not be required to request a new EIN simply by becoming an S-corporation.
The IRS also does not require a new EIN if the name of the business is being changed as opposed to the structure. Additionally, a new EIN is not necessary if the business is simply changing or adding locations.
Failing to obtain a new EIN in a situation where the IRS requires it can cause a lot of headaches. This is how you will identify your small business for tax purposes and if a mistake is made, it may result in penalties, interest, and other unnecessary expenses if appropriate tax planning has not been completed.
There are no comments yet