In a legal ruling issued in July, the California Franchise Tax Board held that where the only contact with California an out-of-state corporation has is as a member of a limited liability company that is doing business in California, the out-of-state corporation is doing business in California for the purposes of the $800 minimum franchise tax imposed each year on corporations incorporated in, or doing business in, California. The ruling does not draw any distinction between member-managed and manager-managed limited liability companies.
The State Board of Equalization had held in a 1996 case that a limited partner of a limited partnership doing business in California is not considered to be doing business in California merely as a result of being a limited partner, if it had no other contacts with the state. The FTB apparently feels that limited liability companies are different from limited partnerships, although this distinction is murky at best in the case of a non-managing member of a manager-managed limited liability company. It remains to be seen whether this ruling will pass judicial muster for the nexus required under the United States Constitution in order for a state to be able to tax the income of a non-California-based taxpayer.