Q: I have a multi-member LLC. If there is only one person listed as the responsible party, how will the tax process be handled?
Thank you to one of our clients for that great question! Your responsible party is the person listed on your EIN application who has control over your business finances and assets, such as the owner or principal officer of the business. If your business has more than one owner/partner, you might be wondering whom you should list as your responsible party and whether that decision will affect your business taxes. We’ll answer some common questions about what an EIN responsible party is and how it affects your business.
What is a responsible party?
Your business’ responsible party is the person with the power to make decisions about how the business handles its funds and assets. This could be the business owner, principal officer, grantor, or trustor of a trust. A corporation will typically name its principal officer as the responsible party, whereas an LLC will typically name the member/owner with the most decision-making power. Your responsible party must be a person—not a business entity. You can only name one responsible party with the IRS, so if your business has more than one owner, you’ll need to choose one person to fill this role.
You’ll list your responsible party on Form SS-4—the IRS application to receive an EIN. Your responsible party is the person the IRS will contact concerning your EIN or any tax-related issues. You will also need to include the responsible party’s tax ID number (social security number, ITIN, or EIN) on the form.
Learn How to Get an EIN.
Can a business manager be the responsible party?
Usually not. A manager can only be the responsible party if he or she is also a general partner or owner of the business.
What if I need to change my responsible party?
If your responsible party changes—such as if the business is acquired by a new owner or your current responsible party leaves the business—you’re required to file Form 8822-B with the IRS within 60 days of making this change. You must file this form by mail.
If my business has multiple owners, how will choosing a responsible party affect our taxes?
Even though your business can only have one responsible party, this does not affect ownership of the business and how it is taxed. The ownership information for your business should be documented through membership certificates (for LLCs) or stock certificates (for corporations), as well as through your LLC operating agreement or corporate bylaws. Here’s what you need to know about how LLCs and corporations are taxed:
- LLCs are taxed as disregarded entities or partnerships by default, meaning the revenue of the business passes through the business and is allocated to the members as income, who report the income on their personal tax returns. So, if you have a multi-member LLC, naming one member as the responsible party should not impact either member’s taxes, as each member files taxes separately.
- Corporations are taxed as C-corporations by default, which are subject to “double taxation”—the business pays corporate income tax on its profits and can then distribute the profits to shareholders, who must then pay personal income tax on the profits. Corporations can also file with the IRS to be taxed as S-corps, which are taxed as pass-through entities and are not subject to double taxation.
What about liability?
Being a business’ responsible party does not make you personally liable for business debts or legal issues. Each LLC member or corporate shareholder is equally liable for paying taxes on their share of the business profits. LLCs and corporations enjoy liability protection—which protects the owners from being held personally liable for the business’ legal or financial issues—as long as they maintain the legal separation between the business and the owners.
Learn how to protect your assets.
Responsible party vs. nominee
A nominee is someone who is given temporary power to act on behalf of the business during the business formation process—such as an attorney or registered agent. The IRS does not allow you to name a nominee as your responsible party on your EIN application. The basic reason for this is that if the IRS needs to contact your business about your taxes, they don’t want to speak to your attorney or your registered agent. They want to speak to the person who is actually responsible for the business.
What if I want to use a professional service to apply for my EIN?
You can still hire a professional service to obtain an EIN for you. The person filing your SS-4 form just needs to list the true responsible party (the business owner or principal officer) and that person’s tax ID number on the application. The responsible party also needs to sign the form.
Not a bureaucracy fan? Northwest can help you get an EIN.