Once you open a new business, legal and tax documents are not bound to be overwhelming. Tax ID and business license are the two terms that puzzle new entrepreneurs. They are necessary to conduct any operations legally, but their purposes are very different.
Knowing the difference, and similarities, can alleviate what can otherwise end up as a legal and well-documented migraine, and surely makes the newcomer stand out of the box when it comes to being in the right direction at the first opportunity.
What Is a Tax ID and Why Do Startups Need It?
Tax ID or Employer Identification Number (EIN) is a special number established by the IRS that is used to identify your business for taxation purposes. It is a Social Security Number for your business and will be applicable in every federal tax-related matter.
A Tax ID is necessary for startups to:
- Register a commercial account in a bank
- File taxes
- Hire employees
- Establish a business credit
- Seek permits, licenses, or funds
It is good to have an EIN even when you are a sole proprietor to distinguish between your personal and business accounts. This division will give your start-up company a more official and professional appearance to both clients, banks, and partners.
What Is a Business License and When Is It Required?
A business license is a permit granted by your local city, county, or state government that permits you to have a business in a specific area legally. As opposed to a Tax ID, which you can use to identify yourself at the federal level, a business license makes sure you act by the local regulations.
Licensure may be requisite to:
- Have an offline or an online store
- Market products or services in a certain state or city
- Be in a controlled sector (e.g., food, health, construction)
- Adoption of zoning or safety laws
The failure to acquire a mandatory business permit may cost fines and lawsuits, or even closures; even an EIN holder may face these consequences.
SSN vs ITIN: Which One Applies to You?
As a sole proprietor applying for a Tax ID (EIN), you may ask yourself a question whether you should apply for an SSN or an ITIN, particularly in case you are not a U.S. citizen. Let’s break it down:
- U.S. citizens and permanent residents have an SSN (Social Security Number), which is used in the payment and identification of taxes.
- Whenever the non-citizens or foreign entrepreneurs are bound to pay the U.S. taxes, yet they are not allowed to obtain an SSN, an ITIN (Individual Taxpayer Identification Number) is issued.
In case you want to get an EIN, but you have no SSN, you will be able to provide an ITIN instead. But in most cases, you will be required to submit Form SS-4 by either mail or by fax. Awareness of SSN vs ITIN can help you to be sure about the right identification number to use in filing tax registration and prevent the delay of EIN approval.
Quick Comparison: Tax ID vs Business License
To realize the distinction between a business license and a Tax ID (EIN), it is useful to compare the main peculiarities of each of them. The Internal Revenue Service (IRS) issues a Tax ID, which is primarily used at the federal level in reporting taxes and tax identification. It is required in the acquisition of employees, in opening an account in a business bank, or in tax filing.
As opposed to it, a business license is given by your local or state government, and it gives you the license to do business in a particular area or the business industry. In contrast to a Tax ID that is accepted throughout the states, a business license has to be purchased separately on the territory of every state where you operate.
The application process for an EIN is free and can be completed online through the IRS, while business licenses vary in requirements, may involve fees, and often depend on your location and business type. In short, your EIN acts as your business’s federal identity, while your business license ensures you’re operating legally at the local level. Both are essential, but they serve entirely different roles.
How to Apply for a Tax ID and Business License
To obtain a Tax ID (EIN), you need to:
- Go to the IRS website
- Fill the EIN form (Form SS-4)
- Get your EIN immediately (in case of doing it online) or by mail/fax
To apply for a business license:
- To obtain a business license:
- Stop by your local city or state business site
- Identify the licenses of your industry.
- Complete the application and pay the necessary fees.
Also, ensure that you renew your business license on an annual basis, as necessary to be compliant.
Final Thoughts
To be legally obligated and put your startup on the professional map, you will need to have a Tax ID and a business license. One of them deals with your tax identity on the level of the federal government, and the other allows you to proceed with permission on the local level.
If you are a new business person, particularly one that has to figure out the SSN vs ITIN difference, knowledge and early acquisition of the proper identification and permissions are good to avoid getting stuck, and put your company on a path to prosperity.
Remaining organized, proactive, and informed, you will set a legally stable basis for your startup that is prepared to flourish.