"Responsible party" is a tax term for the individual who makes decisions for a business. It's a key piece of information on the application for an employer identification number (EIN). This article discusses the responsible party, how it differs from a nominee, and how determine the responsible party for your business.
Definition and Examples of a Responsible Party
The IRS defines the responsible party as the principal officer of a corporation, a general partner of a partnership, the owner of a disregarded entity (usually a single-member limited liability company (LLC), or a grantor, owner, or trustor of a trust. It's the person who ultimately owns or who exercises ultimate control over a business or other entity.
For business entities, the responsible party is the person who controls, or is entitled to control, the company's funds or assets. It's the individual who manages or directs the entity and the "disposition of its funds and assets." The IRS wants you to identify the true principal officer, general partner, grantor, owner or trustor, not an attorney who isn't an owner, director, or partner of the company.
Multiple partners might qualify as the responsible party in the case of a partnership. You can select the person you want the IRS to recognize and contact as the responsible party in this case.
A responsible party must be an individual, not a business, unless a government entity is applying for an EIN. For example, if a corporation is the general partner of a partnership, the responsible party is the principal officer of the corporation. A responsible party must also have a tax identification number (Social Security or individual taxpayer ID number) to request responsible party status on Form SS-4.
A responsible party isn't the same thing as a registered agent. A registered agent is someone hired to receive legal documents for a business. A registered agent doesn't have any authority in the business other than to sign that they have received legal documents.
How Does A Responsible Party Work?
When your business requests an EIN on Form SS-4, you must name the responsible party on line 7a, and enter the tax ID number of the responsible party on Line 7b. The taxpayer ID can be the individual's Social Security number, individual taxpayer ID (ITIN) or EIN.
Responsible Party vs. Nominee
|Owns or controls and directs the business entity||Has limited authority to act for a business for an isolated purpose|
|Controls the disposition of the entity's assets and funds||Does not have control over the company's assets and funds|
|Can interact with the IRS for purposes of securing an EIN||Not recognized by the IRS for purposes of securing an EIN|
A nominee is given little or no authority over the entity’s assets. They are someone who has limited authority to act on behalf of a business entity, usually for just a defined period of time, often during the formation of the entity. They're often non-employee attorneys who are helping to set up the company.
The IRS no longer allows nominees to be designated as responsible parties for purposes of applying for an EIN. The IRS wants to be certain that the person they contact with regard to the company is someone who can make all decisions on the business's behalf.
How To Change Your Responsible Party
You must change your responsible party designation if you don't have the correct person identified on Line 7a. You can use Form 8822-B to make this change.
The instructions for the form include the correct IRS addresses to use to send in the change. The address you would use depends on your state.
- A responsible party is the individual who controls and manages a business entity and its funds and assets.
- The IRS makes a distinction between a responsible party and other individuals for purposes of securing an employer identification number (EIN).
- A business entity can select the person they want to act as their responsible party in businesses where multiple individuals control and manage the business, such as partnerships.
- If the responsible party for your business changes, you must notify the IRS within 60 days.
Frequently Asked Questions (FAQs)
How do you look up the responsible party for a business?
The easiest way to look up a responsible party for a business is to look up the EIN for the business. An EIN is a public document and it can be viewed by anyone. Then see line 7a of this form for the name of the responsible party.
If you know the state where the business is registered, you can search the records system of that state's corporations division. It's easiest to start with the name of the business, then view the details of the EIN for the responsible party.
A sole proprietorship without an EIN won't have a responsible party.
When should you make yourself the responsible party for your small business?
Small business owners often name themselves the responsible part when applying for an EIN. The responsible party is a person who has control over, or is entitled to the funds or assets of the business. In a single-owner business, the owner is that person. The responsible party also controls, manages, and directs the sale, transfer, or assignment of these funds. Again, that's the business owner in a single-owner business.
If your small business is a partnership or LLC with multiple members, the managing partner or limited liability company (LLC) member-manager may be the responsible party. An LLC may also have a manager to manage day-to-day operations. This person would be the responsible party.
How does the IRS establish a nominee?
A nominee is a temporary person designated by someone forming a business and requesting an Employer Identification Number (EIN). The IRS doesn't establish a nominee; this is done by the business itself. Nominees are not the same as a responsible party, someone who owns or has control over a business.
Businesses sometimes hire nominees to put their name in organizing documents like articles of organization for a limited liability company (LLC). Using the nominee's name keeps the names of the owners out of the public document.