Incorporator The Journal of U.S. Formation
Start Free Quiz
Editorial 8 MIN READ

EIN strategy for a holding company, revisited in March 2020

Four EINs for four entities was the old answer; the emergency-relief queue has not changed it, only made the filing order matter more

The Editors
Staff, Incorporator.org
8 min read Updated
Contents 7 sections
  1. The default rule, unchanged since 2009
  2. What the relief pipeline is going to ask for
  3. The responsible-party rule, still 2013
  4. The online SS-4, and why the filing order still matters
  5. The four-EIN stack, with the 2020 overlay
  6. The cost, still zero, and the close
  7. Sources

holding company with subsidiaries still needs one EIN per entity that has employees, excise exposure, or a bank account. That answer was true in October 2017 and it is true this morning. What has changed in the eleven days since the national emergency declaration on March 13 is the cost of not already having the EINs you need.

Most of what follows is a refresher on the EIN strategy for a holding company, with the 2020 complication layered on: the SBA's Economic Injury Disaster Loan portal opened to COVID-affected small businesses last week, the House and Senate are negotiating a larger package that is expected to clear in the next several days, and every federal-relief intake form is going to ask for an EIN, a formation date, and a responsible party. The entities that already have those three things will be processed first.

The default rule, unchanged since 2009

Form SS-4 is still one page. The IRS still issues one EIN per entity and expects that EIN to last for the entity's life. The situations that require a new EIN (change of entity type, bankruptcy reorganization, new corporation after a statutory merger) are listed in Publication 1635, and the situations that do not (name change, state move, new address) are listed alongside them. None of that has been relaxed for the emergency.

For a single-member LLC, the federal treatment is set by Treas. Reg. § 301.7701-2(c)(2)(iv). The disregarded sub is treated as a separate entity for employment tax under Subtitle C (chapters 21 through 25, covering FICA, FUTA, and income-tax withholding) and for certain excise taxes. It is invisible for federal income-tax purposes, meaning the owner reports. A sub with no employees and no excise exposure can, in principle, live on the owner's EIN or SSN. The moment the sub runs a payroll, the regulation requires it to have its own.

Our October 2017 piece on holding-company EINs worked through the four-entity stack and came out at four EINs: one for the parent, one for each sub. That is still the arithmetic. What follows is the 2020 overlay.

What the relief pipeline is going to ask for

The SBA's COVID-19 Economic Injury Disaster Loan intake form is live at covid19relief.sba.gov as of last week. The first substantive question on the application is the applicant entity's EIN (or SSN for a sole proprietor without employees). The second is the date the business was established. The third is the gross revenues and cost of goods sold for the twelve months ending January 31, 2020. An EIDL applicant that cannot produce those three numbers in the order the form asks for them does not proceed to underwriting.

The CARES Act, which the Senate is still negotiating this week and which is expected to clear both chambers in the next several days, is drafted to create a separate forgivable-loan program administered through SBA 7(a) lenders. Public reporting on the conference text and the draft bill language suggest each applicant will need an EIN (or SSN if a sole prop), 2019 payroll records, and a "no other federal assistance for the same purpose" certification. Until the bill is signed and the SBA posts the interim final rule, the exact application form is not public, but every pending summary assumes the EIN prerequisite.

The operational point for a holding-company group: if the e-commerce sub has payroll and the IP-holding sub does not, only the e-commerce sub will have a 2019 W-2 and Form 941 history under its own EIN. The IP sub, if it has been running on the parent's EIN, will show no employment-tax history as a standalone entity, and that may complicate eligibility for any payroll-tied relief on the IP sub's account. The same goes for any sub a founder was planning to hire into "after the fundraise." If the payroll was never established in the sub's name, there is no 2019 payroll to cite.

There is no grace period announced for cleaning this up. Treasury and SBA have issued guidance at speed over the last two weeks, but none of it has relaxed the one-EIN-per-employer rule under the regulation, and none of it has suggested relief will be paid on mismatched payroll history.

The responsible-party rule, still 2013

Form SS-4 line 7a and 7b ask for the "responsible party": the individual who controls the entity or its funds. The IRS announced the policy change in News Release IR-2013-69 on July 30, 2013, and implemented it in the January 2014 revision of the SS-4 instructions. The responsible party cannot be another entity. It must be a natural person with an SSN or ITIN. Nominees are not acceptable. A parent LLC is not acceptable.

Six years in, this is the single most common SS-4 error on entities formed by founders who have read a 2012 article or copied a pre-2014 template. The fix is mechanical: list a human on each sub's SS-4, typically the managing member of the parent, and keep that assignment consistent across the stack. If the founder is a non-US person without an SSN or ITIN, the online SS-4 application is unavailable; the paper SS-4 goes to Cincinnati by fax, with "Foreign" entered in the TIN field. Fax turnaround has historically been a few business days. In March 2020 the IRS has not published a dedicated service-level update for the EIN unit, but the general guidance on irs.gov/coronavirus warns that paper-based processing across the agency is delayed. Treat fax-based SS-4 turnaround as a week or more, not a few days, and treat international mail turnaround as indefinite.

If the responsible party changes, Form 8822-B is due within 60 days of the change. The penalty for not filing is nominal. The operational cost is that IRS correspondence goes to the old responsible party, and the current founder finds out about a notice when a transcript is pulled six months later. In March 2020 that is not a theoretical problem. If an EIDL or forgivable-loan application is approved and the servicing notice is sent to a responsible party the founder replaced in 2018, it will not reach the entity in time.

The online SS-4, and why the filing order still matters

The IRS online EIN assistant at irs.gov/ein issues an EIN immediately to a US-based responsible party, for free. One SS-4 per day per responsible party is the stated limit; the assistant will reject a second submission from the same responsible party within a 24-hour window. That limit has not been lifted for the emergency.

The practical implication for a four-entity stack is that you need four days to get all four EINs online, or you stagger across multiple responsible parties, or you file on paper and accept a delay that is likely longer now than it was in October 2017. For a founder trying to get clean EIDL applications on file this week, "four days" is the binding constraint that the online one-per-day limit imposes on the whole cleanup.

Filing order still matters. Apply for the parent's EIN first. The sub's SS-4 asks for the sole member's name and TIN; the right answer is the parent LLC and its newly issued EIN. If you file the subs first, the application does not have a member TIN to cite and you end up refiling, which burns another day against the per-day limit.

The four-EIN stack, with the 2020 overlay

Consider the same Delaware parent LLC with three operating subs: an e-commerce sub with employees, an IP-holding sub with none, and a real-estate sub that owns one rental.

The parent gets its own EIN. It needs one to open a bank account, to sign agreements, and to file its own return if it has more than one member or has elected corporate treatment. For 2020 the additional point is that a parent-level EIN is what any federal-relief application will cite for the consolidated group's existence, even when the relief is sized at the sub level.

The e-commerce sub with payroll must have its own EIN. The 2019 Form 941 deposits and the January 2020 W-2s are under that EIN. Any payroll-tied relief the pending bill creates will be calculated from those filings. Using the parent's EIN for payroll here is a compliance error the IRS surfaces the moment a W-2 is matched against a return, and in 2020 it is also an error that will slow or block relief eligibility for the affected sub.

The IP-holding sub with no employees can still, in principle, live on the parent's EIN for federal income-tax purposes. It almost never should, for the same reason it never should have: banks require an EIN to open an account, vendors send W-9s that assume one, and the distinction matters the moment the sub takes on licensees. In 2020, add the relief-application point: the IP sub with its own EIN and its own bank statements has a standalone application path if the pending legislation sizes relief by entity rather than by consolidated group.

The real-estate sub with a rental: same analysis. Its own EIN, its own account, its own Schedule E. If the property is in a disaster area the SBA declared for EIDL purposes, the rental LLC applies in its own name. An EIDL under the parent's EIN for a loss at the sub-level property is a claim that will be returned for correction.

One pattern the emergency has surfaced: founders who set up a sub quickly under the parent's EIN in 2018 or 2019, intending to "fix the EIN later," are now doing that cleanup in the same week they are trying to file EIDL applications. The cleanup is not hard. It is the timing that is expensive. An amended Form 941 for Q4 2019 under the correct EIN is a straightforward filing; an amended 941 filed the same week an EIDL application is pending is an audit trail that slows the loan.

The cost, still zero, and the close

EINs are still free from the IRS. The online assistant still issues them immediately to a US responsible party. The cost of getting this wrong has been the same since 2009: amended payroll returns, W-2c forms, state unemployment accounts reopened under the correct tax ID, and hours on the IRS Business and Specialty line. The 2020 addition to that list is a delayed or denied federal-relief application, which in a zero-revenue month is a different kind of expense than the audit annoyance of a normal year.

Rule of thumb: give every entity its own EIN, apply for the parent first and the subs second, list a human (not the parent) as responsible party on each SS-4, file Form 8822-B within 60 days whenever that human changes, and if there is a sub that has been living on the parent's EIN, fix it this week rather than the week the relief portal opens.

Sources

Keep reading

More from the journal.