One FEIN or two?
Although Federal Identification Employer Numbers (FEINs) probably aren’t something you spend a lot of time thinking about, knowing the basics behind that 9-digit number the IRS assigns could save you money—and more than a few headaches.
Let’s deconstruct the FEIN. Gidget Donovan, manager of financial services with Delaget Books, which handles payroll and accounting for some of the nation’s biggest QSR franchises, talks about what to consider. Don’t forget to consult your legal advisor before making any changes.
Q. How do franchisees with multiple units often make the decision to go with one FEIN or two?
Companies often have multiple FEINs divided along business unit lines or geography or as a result of an acquisition. There can be legal advantages to either, but many times, if stores are underperforming, clients tend to keep them separated by FEIN because separate FEINs offer protection from liability and clarification in delineating losses and profits per location.
Q. What are the advantages of having just one FEIN for multiple units?
Having one FEIN is more cost effective as it takes less time to handle tasks, which brings down internal costs as well as hard costs for those franchisees who outsource payroll and accounting. With one FEIN, all business documents are filed once under that number. With multiple FEINs, invoices must be separated as does revenue, payroll information etc. If there’s one FEIN, it serves as an umbrella for multiple filings.
There are also fewer bank accounts if a business has just one FEIN—that means less time spent on daily bank downloads, Posi Pay loads, cash/credit card verifications, and bank reconciliations. Fewer banks mean fewer fees.
There are also administrative fees associated with each account, not to mention check runs, postage, separate sets of financials, and so forth.
Q. What are the advantages of having multiple FEINs?
In certain cases, there is better legal protection—in terms of liability—when you assign a separate FEIN for each location. Additionally, it can be easier to track losses and gains for individual stores when each store has its own number. Multiple FEINS can also clearly delineate how much tax is paid quarterly and annually per location. And if an operator, or its outsourcing agency, needs to isolate information quickly, it can take less time.
Q. What does the IRS say about multiple FEINS?
There’s no legal limit to the number of separate businesses an individual or entity can own and operate. The only stipulation is that each new FEIN is appropriated for a separate and distinct entity. So if you had a restaurant and a retail clothing boutique, you’d be required to have a FEIN for each one. But if your businesses are inter-related, as are restaurant franchises, one FEIN is fine. Or you can choose multiple FEINS. It’s up to you. (Source: IRS.gov)
Q. Will an overhaul of the corporate tax code change anything regarding FEINs?
There’s no way to know before it happens. Staying up to date on multi-state payroll and tax laws can be confusing, time consuming, and hard on the nerves. An easy way to stay on top of changes to the tax code and potential roadblocks is by outsourcing your payroll and accounting to a provider experienced in the restaurant industry, like Delaget. By working with an accounting partner, you can be confident you’re always in compliance, up to date on changes, and free from accruing any fines.
Consider the “happy-medium” option
Multiple FEINs offer protection against liability yet accrue higher administrative costs; single FEINS cost less but can make businesses susceptible to legal action. There’s another option: Forming an LLC for one company and establishing other businesses or locations as DBAs (Doing Business As).
For example, let’s say your LLC is “Frank’s Subs” and you have several pizza locations as well. You could file those pizza locations under your LLC as DBAs called “Frank’s Pizza.” You still only need one FEIN, which keeps costs low, but now you also have added protection because, if Frank’s Pizza is sued, the plaintiff can’t go after Frank’s Subs. The LLC’s assets are not accessible in a lawsuit against a DBA under that LLC.
One caveat though: Let’s say you form another DBA under your LLC: “Frank’s Ice Cream.” If Frank’s Pizza is sued, the plaintiff can go after the assets in Frank’s Ice Cream. So, DBAs under the same LLC can face liability even if only one DBA is involved, but the main LLC is protected.
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The intricacies of business—especially multiple businesses—can be confusing. At Delaget, we can help grow your franchise and free you from the administrative headaches brought on by changes in tax code and regulation.
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