by LLC attorneys Richard C. Keyt, JD, MS (accounting), and Richard Keyt, JD, LL.Chiliad. (federal tax constabulary)

The California Franchise Tax Lath (FTB) states that a limited liability company taxed equally a partnership is required to:

  • Pay an annual minimum taxation of $800.
  • Pay an almanac fee the amount of which depends on the LLC's income from all sources attributable to orderderived from California.
  • File California Franchise Tax Board Form 568 (LLC Return of Income).

The to a higher place requirements apply if any of the following applies to an LLC:

  • The LLC is formed in California.
  • The LLC registered with the California Secretary of State to transact business in California.
  • The LLC was not formed in California (a "foreign LLC"), but it does business in California (meet Revenue & Taxation Code Section 23101 for the definition of "doing concern in California").

Notation:  Doing business in California is not necessarily  the same as transacting intrastate business.  See "When Is a Person or Entity Doing Business organization in California?"

You would recall that an LLC formed outside California would have to really have a presence in California before it would exist "doing business" in California.  Unfortunately, the money-starved State of California takes a much broader view of doing concern in California, which means that many LLCs formed outside California are unknowingly doing business in California and are therefor bailiwick to the $800 minimum tax, the gross receipts tax, filing  Form 568 and paying California income revenue enhancement.

Example ane:  Homer Simpson is a resident of California and a member of an Arizona LLC chosen "Globe Wide Widgets, LLC."  The Arizona LLC owns real estate in Arizona.  The LLC hires an Arizona property management visitor to collect rent and maintain the belongings.  Homer has the power to rent and fire the property manager.  From fourth dimension to fourth dimension Homer calls the property manager most the holding.  Homer is ultimately responsible for the LLC's assets.

This example is Case 1 on page 4 of the FTB'south General LLC Information Form 3556.

The FTB requires World Wide Widgets, LLC, to file FTB  Form 568 and pay California state income tax because Homer, while a resident of California, acted on behalf of the foreign LLC.  The FTB takes the position that a foreign LLC does business in California if any member, manager or amanuensis of the foreign LLC conducts business concern in California on behalf of the strange LLC.

FTB's Statements on Doing Business in California

California defines doing business organization equally "actively engaging in whatsoever transaction for the purpose of financial or pecuniary gain or profit" (R&TC Section 23101(a)). An LLC is "doing business organisation" if any of the LLC'southward members, managers, or agents performs activities in California on behalf of the LLC, regardless of where the LLC otherwise conducts business. In addition, an LLC is "doing concern" in California under R&TC Section 23101(a) if it is a nonregistered foreign LLC that is a member of an LLC classified for taxation purposes as a partnership) that does business organisation in California.

For tax years that begin on or after January 1, 2011, an LLC, is also doing business organization in California if any of the following apply:

  • Sales equally divers in subdivision (e) or (f) of R&TC Section 25120, including sales by the taxpayer's agents and independent contractors, in California, exceed the bottom of$500,000 or 25 percent of the LLC'south total sales.
  • Real or tangible property in California exceed the lesser of $50,000 or 25 pct of the taxpayer'south full real and tangible property.
  • The amount paid in California for compensation, as divers in subdivision (c) of R&TC Section 25120, exceeds the lesser of $50,000 or 25 percent of the full compensation paid by the taxpayer.

The FTB may increase the above dollar amounts each yr. For the preceding weather condition, the sales, property, and payroll of the taxpayer include the taxpayer's pro rata or distributive share of the sales, property and payroll of pass-through entities such equally entities classified every bit partnerships for income tax purposes. (R&TC Section 23101(d)).

Here some additional examples from FTB Grade 3556 of which a foreign LLC is doing business in California.

Example 2: Rachel is a California resident and fellow member of an Oregon LLC. The Oregon LLC has a retail store in Oregon. Rachel uses a California address for the LLC'southward tax filings and a California auditor to prepare the LLC's tax returns. Rachel conducts business organization in California on behalf of the LLC. The LLC must file Grade 568.

Example 3:  Sarah is a California resident and a member of a Texas LLC. The Texas LLC receives royalties from Texas oil wells. Sara maintains a California business bank account and secures financing in California for the LLC'due south Texas investments. Sara conducts business organisation in California on behalf of the LLC. The LLC must file Class 568.

The problem with Examples 2 and iii is that each contains two dissimilar acts instead of one.  Query:  Is FTB saying a foreign LLC must appoint in two acts inside California before information technology is accounted to be doing business in California?  We suspect that the FTB would say that one deed in California is sufficient to cause the foreign LLC to do concern in California.

FYI:  LLCs classified as corporations should refer to FTB Publication 1060, Guide for Corporations Starting Business in California. This publication provides information for these types of LLCs.