Federal EINs: Necessary, but time consuming
A Federal Employer Identification Number (FEIN or EIN) is used to identify a business entity and is issued by the IRS. Because this is required to open a bank account and employ workers, it is typically essential for all businesses to obtain an EIN upon formation. The IRS changed its procedures around obtaining an EIN, making the process potentially more time consuming — particularly for those who file frequently, like major corporations and law firms.
How is an EIN obtained?
One of the major changes the IRS made is that U.S. entities can no longer obtain an EIN over the phone. U.S. entities can only apply online, by fax, or by mail. If your organization was formed outside of the U.S. or U.S. territories, you may apply by telephone as well as by fax, online or by mail.
This process can take anywhere from a minimum of four days (if applying by fax) to four weeks (if applying by mail) or longer if all of the required information is not provided. The online application process is the fastest. Once the application is completed and the information is validated an EIN can be issued immediately.
Hurdles for multiple EINs
Although the online process may seem like a fast and simple way to obtain an EIN, this is not necessarily so, particularly for frequent applicants.
Designating a “responsible party”
All EIN applications (mail, fax, electronic) must disclose the name and Taxpayer Identification Number (SSN, ITIN, or EIN) of the "responsible party" who controls, manages, or directs the applicant entity and the disposition of its funds and assets. Unless the applicant is a government entity, the responsible party must be an individual (i.e., a natural person), not an entity.
The following persons are considered appropriate responsible parties:
- For a corporation whose shares are traded on a public exchange or registered with the Securities and Exchange Commission (SEC), a principal officer
- For a partnership, an individual general partner
- For a partnership whose general partner is a corporation or other entity, an individual who would be considered a responsible party for that corporation or other entity
- For a tax-exempt organization, a principal officer
- For a government entity, the agency or agency representative in a position to legally bind that government entity
- For a trust, the grantor, owner or trustor
- For a decedent’s estate, the executor, administrator, personal representative or another fiduciary
- For all other entities, the person who has a level of control over, or entitlement to, the funds or assets in the entity that, as a practical matter, enables the individual, directly or indirectly, to control, manage or direct the entity and the disposition of its funds and assets.
The IRS does not authorize the use of nominees to obtain EINs. A "nominee" is someone who is given limited authority to act on behalf of an entity, usually for a limited period of time, and usually during the formation of the entity. The "responsible party" is the individual or entity that controls, manages, or directs the entity and the disposition of the entity's funds and assets, unlike a nominee, who is given little or no authority over the entity's assets.
EIN issuance is limited to one EIN per responsible party per day
Only one federal EIN can be obtained per responsible party per day. This means, for example, if a company wanted to form five entities it must apply once per day over five days.
Plus, while online applications tend to be quicker, they can only be done once per responsible party. Therefore, once a company has obtained an EIN for an entity through the IRS online portal, all EINs for subsequent entities they form must now be done via fax. This can take several days and requires significant time invested in follow-up.
Reporting changes of address or responsible party
Entities must report any changes to their business mailing address, business location or identify of their responsible party. Changes to the responsible party must be reported to the IRS within 60 days. Form 8822-B, Change of Address or Responsible Party – Business, is filed to notify the IRS of these changes.
Working around these hurdles and also tracking multiple EIN applications means that law firms and corporate paralegals spend a substantial amount of time focused on this process alone.
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