Coffee shops are a great business model offering entrepreneurs terrific opportunities. You can open a café, franchise an existing brand (e.g., Dunkin’), operate a mobile coffee shop, or lease a kiosk or small space in areas such as hotels, malls, or other locations to sell coffee.
The coffee market in the U.S. is profitable and, according to some statistics, the largest in the world with consumers drinking, on average, 1.87 cups of coffee a day. New business owners who find a demand and prime location can do well.
While it’s exciting to think about the possibilities of how to launch and operate a business, it’s important to also think about necessities, such as licenses and paying taxes. Every for-profit business, regardless of industry or size, must pay taxes. To do so, the owner will need a tax ID, which can either be a Social Security number (SSN) if you’re a Sole Proprietor or an employer identification number (EIN).
In this article, we’ll delve more into what exactly an EIN is, who would be required to get one, and why all coffee shop owners should get one to gain access to the many benefits that come with getting an EIN.
What is an EIN?
Employer identification numbers are nine-digit, unique tax identifiers used solely by businesses. To get an idea of how they work, you can compare them to Social Security numbers. Individual taxpayers all get one that is unique to them. An EIN pretty much works the same way, except these tax IDs are reserved for businesses.
Does My Coffee Shop Need an EIN?
Most coffee shop owners will likely need to obtain an EIN unless they are a very small business and are the only employee. If these criteria apply to your coffee shop business, you will need to obtain an EIN.
- Employees work for you (even if it’s just one other person)
- You register your business as a corporation
- You register your business as a partnership
- You register your business as an LLC
- You open a Keogh plan to save for your retirement
- You open an individual 401(k) to save for your retirement
If you register as a sole proprietor, you do not need one unless you have other attributes where federal and/or state law requires you to obtain an EIN. However, even if you are one of the minority coffee shop businesses that does not need an EIN, you should think about applying for one so you can gain access to the benefits it opens doors to.
In this article, we’ll explore the five best advantages associated with getting an EIN and the information you need to obtain one. Without further delay, let’s talk about the benefits of an EIN for coffee shop owners.
1. The Law Requires You To Have One
While a minority of coffee shop owners will fall into the category where an EIN is not needed, it is far more likely for a coffee shop to require employees to operate efficiently.
Most small coffee shops, depending upon how many hours a day and days a week they are open, will need employees. This includes baristas, cashiers, and support staff. Larger ones may need even more staff, especially if they operate all day.
Any business with employees, even just one, is required by law to obtain an EIN.
2. Provides Protection from Identity Thieves and Other Cybercriminals
Acquiring an EIN for any small business, including coffee shops, provides a layer of protection from identity theft. A persistent problem in both the U.S. and across the globe, identity thieves show no signs of giving up.
According to statistics, the Federal Trade Commission (FTC) logged over 1 million ID theft reports in 2023, which led to multiple types of other fraud. Losses to consumers collectively range in the tens of billions of dollars each year.
Any business owner who isn’t obligated to get an EIN must use their SSN for tax purposes and on certain documents relating to vendors, suppliers, lenders, and other entities. If a data breach or theft occurs, your SSN is compromised, potentially on a grand scale.
Utilizing an EIN for business purposes means you can use this tax identifier instead, keeping your SSN more secure. Keep in mind, that you cannot control the stringency of how other entities handle their cybersecurity procedures – some are strict, and others are lackadaisical or not well-versed in how to best protect sensitive data.
If a breach exposes your EIN, that’s bad, but it is much worse to have your SSN exploited.
3. Offers Ability to Open a Business Bank Account
Some banks and credit unions do not require an EIN to open a business bank account, but this is not a given. Many do require one before they allow a business owner to open an account to use for a business. Having an EIN makes it a lot easier to apply for a business bank account, which is advantageous because you can use it to make deposits and pay off bills.
Another benefit to having access to a business bank account is it offers a clear separation of your personal and financial accounting. When your business and personal financial transactions blur, this can create complications, especially if you’re operating your coffee shop as a single-member LLC. LLCs need clear delineation between their accounts, or they risk losing the financial and legal protections that an LLC business structure offers.
4. Easier to Get Approval for a Business Credit Card
Gaining the ability to have access to credit is vital for most small businesses, such as coffee shops. You might run out of essentials before your next big order is due to arrive and, as a result, may have to run to a warehouse club or other retailer to buy what you need. Using credit cards is a fast and easy option.
The thing is, most credit card issuers will likely ask you for your EIN before they grant you a business credit card. (This is not always the case, but why take that chance?)
Another benefit is you do not have to commingle charges with your personal credit card, further separating the line between your personal and business financial transactions. This means you can keep distinct credit ratings for both yourself and your business.
This leads to the next benefit…
5. Higher Ability to Access Favorable Loan Terms
At some point, you might decide to expand your business or need a larger sum of funding that a credit card cannot cover. If you have a strong credit score established for your business, you will likely have a much better ability to access favorable loan terms.
Consider that you might want to open a second location, obtain a company-owned van, move to a larger storefront, hire more employees, or buy new equipment for your coffee shop. Your EIN and good credit standing could make the difference between approval or denial or an affordable vs. an unaffordable interest rate/loan terms.
What You Need to Obtain an EIN
Before applying for an EIN, you want to be certain you have assembled all the required information to enter into your application to the IRS.
You will need to supply specific information about your business, including the legal name of your coffee shop, your DBA designation (if you use one), the address of the shop, and its phone number. Other business-related information is the date you began your coffee shop, what business structure you registered it as, and what tax structure it uses. If you have employees or plan to have employees, you will need to include this information as well.
As the business owner and responsible individual for the business, you will have to provide your full name and your Social Security number (or ITIN if you use that instead). There will be a place on the application asking why you are applying for an EIN; be sure to select a reason. Once you complete your application either using the mail or an online service to get an EIN, take the time to proofread it carefully and ensure all questions are answered correctly. Do not leave any blanks for the required information. It’s essential to submit an accurate application, or it can lead to delays or potentially a denial
Obtaining an Employer Identification Number is a Worthwhile Effort
Opening a coffee shop is an exciting prospect. If the market’s growth is any indicator, consumers love their coffee!
Launching any new business means a lot of hard work. Before you get into the nitty-gritty of running the daily operations of a coffee shop, you want to make sure you select the best business structure for your business and determine if you need an EIN.
Coffee shop owners have a high probability of falling into a category the IRS requires to have an EIN. If you are operating without one, you could find yourself in hot water with the federal tax agency (and possibly your state, too).
Even if you fall into a category where your coffee business does not need an EIN, you should seriously reconsider getting one. You will gain many advantages, yet not really take on any disadvantages from having one.