Tax Identification Numbers and Tax Classifications

When a real estate investor or his attorney is filing for a Limited Liability Company (or any other business entity) with the Georgia Secretary of State’s office, it is pertinent to make sure that he or she acquires a federal Employer Information Number (EIN) from the IRS as well. Federal law requires federal taxpayer identification for income and employment taxation purposes. Furthermore, banks generally require an EIN to open any business account. For these and other reasons, business owners will benefit by applying for their EINs as early as possible in their business entity formation process.

Applying for an EIN can be a relatively simple process, but complications may arise where foreign persons or entities hold ownership interests in a company seeking an EIN. For example, IRS Form SS-4 requires applicants to name a “responsible party.” The responsible party can be held liable for any failure by the business to withhold and pay over income tax withholding or social security taxes. In the case that a business entity that is not publicly traded or registered with the Securities and Exchange Commission, the responsible party may be an individual, or if the owner of the entity being applied for is another disregarded entity for tax purposes, the responsible party can be this parent entity itself.

This individual or entity is defined as “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 named responsible party must also have a social security number or an individual tax identification number (ITIN). Therefore, if the responsible party is a foreign person, he or she must obtain an ITIN before the entity can properly obtain an EIN. Failure to provide correct information to the Internal Revenue Service at the outset can result in later problems. A good attorney can help investors avoid making crucial mistakes on IRS forms, thus reducing the likelihood of unexpected tax liabilities.

A good tax professional, such as an attorney or accountant, can advise a business owner of how to avoid excessive taxation on his or her business entity while remaining within the bounds of the law. Therefore, a real estate investor should consult with his or her tax professional when choosing a tax classification for their LLC or other business entity. By default, single-member limited liability companies are taxed as sole proprietors, and multi-member liability companies are taxed as partnerships. However, certain limited liability companies, including single-member LLCs, may be able to save money and reduce self-employment taxes by electing S-Corporation taxation status. The overall benefit of electing S-Corporation taxation may be determined by factors including the value of the assets the company holds, whether or not the company has employees, whether or not the company provides personal services (such as consulting), and the extent to which the company holds passive investments, including real properties.

While these filings might seem simple, there are tax and legal implications that complicate the process, and it is very important that these questions are answered upfront and procedures agreed to between an investor and his CPA and attorney before filing with the IRS or Secretary of State’s office. An experienced tax professional can effectively weigh the pros and cons of certain tax elections based on your circumstances and develop a plan that best fits your business entity’s needs.