According to the California Franchise Tax Board, a limited liability company classified as a partnership must do all of the following:
- File Form 568 (limited liability company return of income);
- Pay an annual tax of $800;
- Pay an annual LLC fee based on total income from all sources derived from or attributable to California.
An LLC is subject to these requirements when:
- It is organized in California;
- It is registered with the SOS to transact intrastate business in California; or
- It is doing business in California (R&TC Section 23101).
As I’ve previously discussed, transacting intrastate business is not the same as doing business in California. See You May Be Doing Business In California Even When Not Transacting Intrastate Business.
Commonsensically, one might expect that an LLC must itself conduct some business in California to be considered as “doing business” in the state. However, common sense has never been a defining characteristic of taxation. Consider the following example:
Paul is a California resident and a member of a Nevada LLC. The Nevada LLC owns property in Nevada. The LLC hires a Nevada management company to collect rents and provide maintenance. Paul has the right to hire and fire the management company. He occasionally has telephone discussions with the management company regarding the property. He is ultimately responsible for the property and oversees the management company.
According to the FTB, the Nevada LLC must file an LLC return of income (Form 568) because Paul conducts business in California on behalf of the Nevada LLC. The FTB considers an LLC as doing business in California if any of its members, managers, or other agents conduct business in California on behalf of the LLC. In fact, this example can be found in the FTB’s filing information for LLCs (Form 3556).
Because the FTB has simply announced this interpretation of Section 23301 without complying with the rule making provisions of the Administrative Procedure Act, I’ve submitted a petition to the Office of Administrative Law seeking a determination that this interpretation is an underground regulation. An “underground regulation” is:
“any guideline, criterion, bulletin, manual, instruction, order, standard of general application, or other rule, including a rule governing a state agency procedure, that is a regulation as defined in Section 11342.600 of the Government Code, but has not been adopted as a regulation and filed with the Secretary of State pursuant to the AP A and is not subject to an express statutory exemption from adoption pursuant to the APA.”
1 CCR § 250. Assuming that the OAL determines that my petition is complete, it will have 60 days to determine whether to consider or decline my petition.