Business License Vs. Tax ID

One of the primary distinctions between a business license and a tax ID number is that of obligation. A legally operating business has all necessary business licenses and permits to function in the city and state where it is located. Whether a business has a tax ID number comes down to a number of factors. Recognizing these factors and understanding the process of acquiring a business license or a tax ID number–or both–is a matter of understanding the steps involved in starting a small business.

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Registration

Starting a small business is not necessarily an onerous process, but it requires familiarity with a series of steps. First and foremost, the small business owner must choose a unique name for that business and then register that business. Registering the business indicates that the business owner intends to operate a legal company that will follow all city, state, and federal laws for operating a business. In most states, including Texas, you can register the business by contacting the office for the secretary of state (See Resources).

Licenses

Any business that has been registered as a legally operating business almost certainly needs a business license. When a small business owner gives his business a name and then registers that name in the state where he lives, the state will also require that the business owner obtains any necessary licensing. Some businesses fall under federal jurisdiction and require extra permitting. Contact your state’s regulatory office, or utilize the “Permit Me” feature of Business.gov, which provides a list of licensing and permitting requirements for common business types in each state.

Tax ID

A tax ID number is also known as an Employer Identification Number that the Internal Revenue Service provides to a legally established business. The EIN is essentially the Social Security Number for the business and separates the business from the individual who owns and operates it. Business owners who do not have an EIN use their Social Security Number for the business. Business owners can apply for an EIN online at the IRS website. Some states, such as Texas, also require you to obtain a state tax ID for your business, which you can do by contacting the department of revenue for the state.

Requirements

A registered small business must review and apply for all necessary licensing. The business cannot operate legally without licensing. And if the business falls within industries that have extra regulation, the business must also review and apply for all necessary permits. For some small businesses, the EIN is considered useful for separating the business from its owner during taxes; but it is not necessarily required. The IRS does require an EIN for certain situations: businesses with employees, businesses that file as partnerships or corporations, and businesses that file taxes for employment, excise, alcohol, tobacco or firearms.

Considerations

Failure to acquire the correct business licensing can lead to severe penalties at a number of levels: federal, state and local. Failure to acquire the Employer Identification Number can create problems during taxes and lead to an audit. As a result, small business owners should consider applying for an EIN–in addition to obtaining all required licensing–when they register their business. Completing these steps in the beginning can prevent problems later on.

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Source: http://docphy.com/business-industry/business/business-license-vs-tax-id.html