EIN confusion with small business mergers, nesting, and ownership changes

small business, tax, Uncategorized

I had a handful of small business EIN (Employer Identification Number) issues this past week that prompted this blog post. This is not meant to be advice or opinion, but rather just a retelling of the story summaries.

Case 1:
A single member LLC (Limited Liability Company) owner operates all aspects of her business under the LLC’s EIN. This includes business contracts, bank accounts, online advertising, employer agreements, tax accounts, etc. The owner noticed the instructions for a W4 said to use the owner’s EIN and not the business EIN since the EIN is a disregarded entity. But since the individual owner’s EIN is not associated with the business contracts, the W4 was rejected as a mismatch by the recipient for 1099 purposes this month.

Case 2:
A husband-and-wife partnership had an EIN issued with the wife’s name listed on the first line of the EIN letter. The business conducted all its federal tax activities as a disregarded entity as allowed under Rev. Proc. 2002-69. After the couple divorced, the husband continued to file taxes for the business as a disregarded entity under the same EIN. But when the business applied for relief under the Payroll Protection Program and EIDL (emergency injury disaster loan) administered through the Small Business Administration, the application was rejected because the name on Line 1 of the EIN letter (ex-wife) did not match the name of the business owner. The cause of the rejection was just recently understood; no covid recovery assistance was received and the business closed last year.

Case 3:
A sole proprietor operating under a legally filed DBA (“Doing Business As” a trademarked name) has a business banking account under the DBA’s name that uses the sole proprietor’s EIN. The business applied for an account with an online service provider called Anchor that offers small business billing and collection services. The application was rejected because the business name on the business bank account did not match line 1 of the EIN letter (sole proprietor). The proprietor does not want to open the Anchor account under his own name or EIN, so will likely abandon this Anchor business service application for now.

Case 4:
A single member LLC owner operating a contracting business acquired another ‘flashy’ business’s assets including name and logo and wants to abandon its old business name and begin using the newly acquired DBA business name to improve marketing results. The owner filed for a business amendment with the state but is having trouble changing its service and advertising contracts to the new name because these services use a TIN matching that shows the new business name does not match the EIN. The owner hopes to use the state-issued amendment certificate; however, these automated online services and advertising providers do not have a straightforward way to allow the name change update.

Case 5:
A person who owns multiple businesses of several types and each with its own EIN wants to form several new nested multi-state LLC where the specific stated purpose is to avoid disclosure of the name of one of the individual members. The person is clear that there is no intent to avoid or reduce taxes, he simply has an obligation to protect the identity of one of his high-profile business associates. However, he notices that IRS Regulation 301.7701-2 and -3 say that for most tax purposes and that the instructions for a form W-4 (to receive a business payment) seem to require the individual owner’s EIN for a one member LLC as opposed to the LLC’s EIN. That disclosure would effectively bypass the privacy protections intended by the multi-level multi-state nested LLCs.

Case 6:

Following a series of natural disasters and high Covid deaths and disabilities within a rural small business community, a small business corporation is taking over and slowly rebuilding the business operations and the properties that were abandoned. The former business enterprises were mixed types: sole proprietors, LLCs, and several abandoned nonprofit organizations. The reorganization is expected to take years since some matters are in litigation and some members died intestate with no executor other than the state. In the meanwhile, all management and financial activities are consolidated into the one corporate manager’s account. There are no tax challenges yet, but we see risks with one taxpayer (the corporation) reporting transactions on property titled by another taxpayer. Assignment of income and combination of unrelated business activities for tax reporting purposes appear to be risks with this business plan.

It appears, in general, that mismatch of EINs went largely undetected in the past but is likely to be a more significant issue in the future as matching technology improves.

#smallbusiness, #LLCs, #tax

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small business, tax, Uncategorized

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