Which to Get First, Incorporation or Employer ID?
As you start your new business, two important first tasks are incorporating the business (registering it with your state) and filling out an Employer ID application. These two tasks must be done immediately but they can be done in either order, presenting one of those "chicken and egg" situations. Which must be done first?
To "incorporate" means to start a corporation by registering it with the state where it will do business. Limited liability companies (LLCs) and partnerships are also formed by registering with a state, so the information in this article applies to them too.
Filing an EIN Application
Most businesses need an Employer ID Number (EIN), the federal tax ID for a business. To get this number, you must submit an application on Form SS-4. You'll need to know the name of the business, the address (you can change this later), and the legal type. You can file the EIN first before you set up the legal type, as long as you don't wait too long to do this.
Before you apply for an EIN, check to see if you need one. You'll need an EIN if you have employees, you are starting a corporation, partnership, or LLC, or in several other circumstances.
Incorporating Your Business
To incorporate a business or form an LLC or partnership, you will need to register your business with your state. To register, go to the website of your state's business division (usually within the secretary of state's office). Find the forms and process for registering. Some states will accept your registration online.
The document you will need to file to register the business is different for each business type:
- For a corporation, file Articles of Incorporation
- For an LLC, file Articles of Organization or a Certificate of Organization, depending on the state
- For a partnership, the document name differs depending on the type of partnership and the state. It might be a partnership registration statement or a statement of partnership authority.
You will need to know the name of the registered agent (the person responsible for sending/receiving official documents) and this person must have a physical address (not a PO Box) in that state (you can be the registered agent). If your company will sell stock, you will also need to know how many shares of stock there will be initially, and some other information.
You aren't required to have an attorney help you with the incorporation documents, but it's a good idea to get this person involved in the process. Many states have default language in these documents that may not be what you and the other owners want. Having an attorney help you craft the language can save you from a costly mistake later.
You will also be required to pay for the incorporation application when you send it in or apply online. If you don't have a business checking account, you'll have to use a personal checking account or credit card and get reimbursed.
Getting a Business Checking Account
Your business almost always will need a business checking account. It is probably the most important thing you will need in order to pay for the registration with your state. But unfortunately, most banks require you to have an EIN for your business before you open a business checking account. Yes, that's the same bank where you would set up your business checking.
How do you get around the chicken-and-egg dilemma of business checking and business registration? The easiest way is to use your personal checking account to fund the business registration with your state. Then, make an accounting entry to transfer this cost to your business.
Here's how: Let's say your state registration amount is $50. You have written a check from your personal checking account to pay this amount. When you get your business accounting set up, have your accountant create a journal entry to show a capital contribution of $50 from you (the business owner) to your business.
Don't let the bank talk you into a "self-employed" business checking account that you start then close after you have your tax ID number and state registration. It gets way too confusing on this.
The Easiest Solution
The easiest way to get started in a new business is just to get the local licenses and permits and start a sole proprietorship. If you are just forming a sole proprietor business, and you aren't registering your business with your state, you can set up this "self-employed" business. If you don't have employees, you also don't need an EIN (you'll use your social security number).
Does Order Matter?
You will need the same information for both the EIN application and the business formation document. It may be good to do the EIN first, then get a business bank account set up, and use your first check or credit card to pay for the incorporation fee.