Starting a U.S. Business as a Foreign Owner: FEIN, Responsible Party, ITIN, and Common Mistakes to Avoid

One of the first steps after forming a new U.S. business entity is obtaining a federal employer identification number, often called an EIN or FEIN. The FEIN is the business’s federal tax identification number. It is issued by the Internal Revenue Service and is used to identify the company for federal tax and reporting purposes.

Even if a business has no employees yet, obtaining an FEIN is often essential. A company commonly needs it to open a business bank account, file tax documents, separate business finances from personal finances, work with payroll providers, and handle many ordinary compliance and operational matters. Banks also commonly request the FEIN as part of the account-opening process.

What is a FEIN?

A FEIN, or federal employer identification number, is a 9-digit number assigned by the IRS to a business or other entity for tax filing and reporting purposes. It functions much like a Social Security number for a company. The IRS uses it to establish and track the entity’s tax account.

Why a new business usually needs a FEIN

In practical terms, a FEIN is often necessary almost immediately after formation. A business may need it to:

• open a U.S. business bank account

• file federal tax returns and other IRS forms

• process payroll and employment taxes if it hires workers

• apply for certain licenses or vendor accounts

• keep the company’s financial identity separate from the owner’s personal identity  

The FEIN is also often requested by accountants, payment processors, and financial institutions when setting up business operations.

Who is the “Responsible Party” on the EIN application?

When applying for a FEIN, the IRS requires the applicant to identify a “Responsible Party.” This is not just an administrative label. The IRS defines the Responsible Party as the individual who owns, controls, or exercises effective control over the entity and who directly or indirectly manages its funds and assets. The Responsible Party must generally be a real person, not another entity.

In most small business situations, the Responsible Party will be one of the following:

• the owner of a single-member LLC

• a managing member of an LLC

• a partner in a partnership

• an officer of a corporation

• another person who truly has authority over the business and its assets

This means the Responsible Party should be someone who genuinely controls or manages the business, not simply someone who agrees to help with paperwork.

Why the IRS asks for an SSN or ITIN

The IRS generally requires a taxpayer identification number for the Responsible Party. That number is often an SSN or an ITIN. For online applications, the IRS states that the applicant must have the Responsible Party’s SSN or ITIN, and the online tool is available only in certain circumstances, including when the principal place of business is in the United States or U.S. territories.

If the Responsible Party has a valid SSN or ITIN and the business qualifies for online filing, the FEIN can often be obtained immediately through the IRS online system.

What if the owner is a foreign national and does not have an SSN?

A foreign national can absolutely register and own a business in the United States. In general, U.S. law does not require the owner of a business entity to be a U.S. citizen, permanent resident, or even physically present in the United States in order to own the company. That is true whether the person is abroad, in the United States in student status, in another temporary status, or even without lawful status. Ownership of a business and authorization to work in the United States are different legal concepts.

That said, while ownership is generally allowed, personally performing day-to-day work for the business in the United States can raise separate immigration and employment authorization issues depending on the person’s status. So there is an important distinction between owning a company and actively working for it in the United States.

When the real owner is a foreign national and does not have an SSN or ITIN, obtaining the FEIN usually becomes less convenient. In that situation, the business often cannot use the standard online EIN process and instead must apply by fax, mail, or in some cases phone, depending on the circumstances described by the IRS. That process often takes longer than an online application.

What is an ITIN?

An ITIN is an Individual Taxpayer Identification Number. It is a 9-digit number issued by the IRS to people who need a U.S. taxpayer identification number for federal tax purposes but are not eligible for a Social Security number.

For some foreign owners, obtaining an ITIN can help with tax compliance and can also make certain IRS processes easier, including situations where the Responsible Party needs a taxpayer identification number on the EIN application.

The temptation to use someone else as the Responsible Party

This is where many foreign founders run into trouble.

Sometimes a foreign owner who does not yet have an SSN or ITIN is told to use another person, often a friend, relative, employee, or unrelated acquaintance, as the Responsible Party simply so the FEIN can be obtained more quickly online. That is a risky shortcut.

There are at least two major problems with that approach.

1.  It may be inaccurate or improper under IRS rules. The IRS says the Responsible Party must be the person who actually owns, controls, or effectively controls the entity and its funds and assets. The IRS also specifically warns against using nominees and says nominees should not be listed on Form SS-4. If a nominee is used, the responsible party information must be corrected.

So, if an unrelated person does not truly own or control the company, listing that person merely to get a faster FEIN may be inconsistent with IRS requirements.

2.  It can create legal, tax, banking, and immigration complications. Using another person’s SSN or ITIN on the EIN application can create confusion about who actually controls the company. It may tie that individual to the company’s tax identity and compliance history, and it can create future problems when the business later needs to correct IRS records, explain ownership, deal with banks, or document control of the company. The IRS requires changes in responsible party information to be reported on Form 8822-B within 60 days.

In some immigration contexts, it can also be a bad idea for an unrelated person in the United States to appear to be the person in charge of a company that is actually owned or controlled by someone else, or for a non-owner to appear to be managing another business. The immigration consequences depend on the facts, but it is a risk area that should be assessed carefully.

The better approach for foreign founders

To avoid these issues, a foreign national forming a U.S. business should usually consider one of these legitimate paths:

a.   Obtain an ITIN, if appropriate. If the owner is eligible to apply for an ITIN and needs one for federal tax purposes, that can provide a proper taxpayer identification number for IRS-related filings. An ITIN is not work authorization and is not the same as a Social Security number, but it is an IRS-issued taxpayer identification number.

b.  Apply for the FEIN through the IRS by fax, mail, or other permitted method. If the foreign owner does not yet have an SSN or ITIN, it is often safer to follow the IRS procedure for applying without using the online shortcut. The IRS instructions for Form SS-4 explain the available methods and the information required. This process may take longer, but it is usually far better than inserting an unrelated person as the supposed Responsible Party just to get an immediate EIN.

Key takeaway

Foreign nationals can own U.S. businesses. In many cases, they can form LLCs or corporations even if they are not in the United States, even if they are in student or other temporary status, or even if they do not currently have lawful immigration status. Ownership itself is generally not the issue. The issue is making sure the company is structured properly, the IRS filings are accurate, the banking setup is correct, and any U.S.-based work activity is reviewed separately for immigration compliance.

A FEIN is a basic and necessary part of launching a business, but the Responsible Party section of the EIN process should be handled carefully. A quick shortcut at the beginning can create much bigger tax, banking, governance, or immigration problems later.

How I.S. Law Firm Can Help

At I.S. Law Firm, we help entrepreneurs and growing businesses with business formation and related legal support. Our business law services include assistance with entity formation, governance, licensing, contracts, and compliance, and our firm also offers integrated immigration and business support for founders and companies navigating both legal systems.

We can assist with:

• forming your LLC or corporation 

• preparing operating agreements, shareholder agreements, and other foundational documents

• help open a bank account for your business

• addressing ownership and governance issues

• coordinating tax ID and formation paperwork with your accountant or tax professional

• reviewing immigration-related concerns for foreign founders and business owners

If you are planning to start a business in the United States, or if you want to make sure your company is set up correctly from the start, contact I.S. Law Firm or Schedule a Consultation. We would be glad to help you register your business entity, prepare the necessary agreements, and build a structure that supports your long-term goals. We have over 20 years of experience helping new and existing businesses register and grow in the United States.

Ismail T. Shahtakhtinski, Esq.

Founder & Principal Attorney

Consultations - I.S. Law Firm

P.: (703) 527-1779

E.: law@islawfirm.com

W.: islawfirm.com