Starting a business in the United States comes with many responsibilities — and two of the most critical involve obtaining an Employer Identification Number (EIN) and understanding Franchise Tax obligations.
This comprehensive guide simplifies both concepts so you can stay compliant and focus on what matters most: growing your business.
🔍 What is an EIN?
An Employer Identification Number (EIN) is a unique nine-digit number assigned by the Internal Revenue Service (IRS) to identify business entities for tax purposes.
Think of it as a Social Security Number for your business — it’s required for filing business tax returns, hiring employees, and opening business bank accounts.
EIN Format: XX-XXXXXXX
🧾 SSN vs. ITIN vs. EIN — What’s the Difference?
|
Identifier |
Format |
Purpose |
Usage |
|
SSN (Social Security Number) |
XXX-XX-XXXX |
For U.S. citizens/residents to track earnings and receive benefits |
Used for payroll, tax filings, and benefits |
|
ITIN (Individual Taxpayer Identification Number) |
9XX-XX-XXXX |
For individuals not eligible for an SSN |
Used for tax filing and treaty benefits |
|
EIN (Employer Identification Number) |
XX-XXXXXXX |
For businesses to identify tax entities |
Used for business filings, employees, and bank accounts |
🧩 Do You Need an EIN?
You must obtain an EIN if your business:
- Hires employees
- Withholds taxes
- Operates as a corporation or partnership
- Pays employment, excise, or specific product taxes (alcohol, tobacco, firearms)
- Changes legal structure or ownership
If you answered “yes” to any of these, an EIN is mandatory.
🏢 EIN Requirements by Business Type
Sole Proprietorships
You will need a new EIN if:
- You incorporate, add partners, or buy an existing business
You won’t need one if: - You simply change your business name or location
Corporations
EIN is required by default.
A new EIN is needed for structural changes (e.g., merger, conversion).
No new EIN is needed if only the name or division changes.
Limited Liability Companies (LLCs)
You will need a new EIN for:
- Multi-member LLC formation
- Single-member LLC choosing corporate taxation
- Corporation converting to an LLC with partnership tax status
You won’t need one for:
- Name/location change or conversion with same tax election
Partnerships
You will need a new EIN for incorporation or structural change.
You won’t need one for name or ownership percentage changes.
📝 How to Apply for an EIN
The EIN application is made through IRS Form SS-4.
Methods:
- Online (fastest)
- Fax
- Phone (for international applicants)
Key Fields in Form SS-4:
- Legal Name of Entity
- Trade Name/DBA
- Mailing Address
- Primary Business Activity
- Entity Type (LLC, Corporation, etc.)
- Single-member LLC question (if applicable)
💡 Important EIN Facts
- Any business with employees must have an EIN.
- If your business structure changes, a new EIN is required.
- Keep your EIN letter in a safe, accessible location.
💰 Understanding Franchise Tax
A franchise tax is a state-level tax imposed for the privilege of doing business in that state — not based on income but typically on net worth or capital stock.
States That Impose Franchise Tax
- Alabama
- Arkansas
- California
- Delaware
- Georgia
- Illinois
- Louisiana
- New York
- Texas
📊 Key Points About Franchise Tax
- Basis: Usually calculated on net worth or capital stock
- Goal: Maintain “good standing” to legally operate
- Minimization: Optimize structure to lower liability
- Impact: Can influence where you choose to incorporate
🏛️ Delaware Franchise Tax Explained
Delaware remains a top choice for incorporation. Every Delaware corporation, even if not operating there, must pay an annual franchise tax.
Due Date: March 1st every year
Minimum Tax: $175
Maximum Tax: $200,000
Two Calculation Methods
1️⃣ Authorized Shares Method
- 5,000 shares or less → $175
- 5,001–10,000 shares → $250
- Each additional 10,000 shares → +$85
- Max annual tax → $200,000
2️⃣ Assumed Par Value Capital Method
Used for corporations with par value stock; more complex but sometimes cheaper.
- Minimum tax → $400
- Multiply your total assumed par value capital (rounded up to next million) by $400 per million
⚠️ Consequences of Non-Payment
Failing to pay franchise tax can lead to:
- Penalties and interest charges
- Loss of good standing
- Legal action and license suspension
- Negative credit impact
✅ Best Practices for EIN & Franchise Tax Compliance
- Apply for EIN early in formation.
- Keep EIN documents safe.
- Track franchise tax due dates.
- Maintain accurate financial records.
- Compare both Delaware tax methods before payment.
- Set aside funds for tax obligations.
- Consult a qualified tax professional.
- Monitor changes in state laws.
🎯 Conclusion
Both EIN and franchise tax are pillars of business compliance in the U.S. Your EIN establishes your business identity, while franchise tax maintains your company’s legal good standing. Staying compliant protects your credibility, avoids penalties, and supports sustainable growth.
When in doubt, consult a licensed tax professional to ensure your specific business structure and state requirements are handled correctly.
✍️ About the Author
This analysis is brought to you by AVA SYNERGY, specialists in corporate advisory, regulatory compliance, and future-of-work policy.We help organizations navigate the complex intersection of technology, employment law, and business strategy — ensuring growth with governance and integrity.
⚖️ Disclaimer
This article is intended for informational purposes only and does not constitute legal or tax advice. Readers should consult with a qualified tax professional or attorney regarding their individual business circumstances.
