CA Annual Tax for Out of State LLCs
Earlier this year a foreign LLC lost an appeal before the California Board of Equalization because its sole member was a California resident and it was unable to prove that it did not conduct business within California (Appeal of Legend Plus Enterprises, LLC (February 22, 2011) Cal. St. Bd. of Equal. Case No 486026.) If you are a California resident and a member of an LLC formed in another state the LLC may be subject to the CA LLC annual tax even if there is no California source income. At first glance it may seem that the LLC is not subject to the tax since it is an out of state entity. However, the FTB presumes the entity is doing business in California if the LLC has a California member. It is up to the taxpayer to prove otherwise.
The FTB takes the position that any activity that is a for profit transaction performed by the California resident member on behalf of the LLC makes the foreign LLC engaged in business in California. Even a non-managing member who is a California resident can cause the LLC to have a business presence in the state. It would be up to the LLC to provide facts and records indicating the California resident member’s activities did not constitute engaging in business within California. This makes it important for California resident members to keep logs of the activities performed and where they are preformed.
California residents who are passive investors and do not act on behalf of the foreign LLC in any capacity will not cause the LLC to be subject to the CA LLC tax.
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