Do you use an out-of-state or “foreign” LLC for your real estate investments? Due to recent changes in California law, you may be considered to be “Doing Business” in California, and must register your foreign LLC with the State and pay the $800 tax anyway!
Many people ask me “What state should I register my LLC in?” “I don”t want to pay the $800 tax in California. Are there any disadvantages of registering my LLC in another state?” No matter what, you must register your LLC in any State where you are “doing business.” Up until recently (2011), this meant – in most cases – if you were a California resident, had formed a Nevada LLC, and owned an investment property in Arizona, you would only need to make sure you registered your Nevada LLC in the State of Arizona. Many investors seek to maximize their returns, and avoiding the $800 franchise tax levied by California is a common reason given for forming out-of-state or “foreign” LLCs. However, in 2011, California changed the rules in 2011 as to how it determines whether or not you are “doing business” in California. Be sure to review the Examples below – they may surprise you!
California defines doing business as “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit” (R&TC § 23101(a)). In addition, LLCs are considered “doing business” in California if:
• It is a nonregistered foreign LLC that is a Although you may come across as a superficial person owing to your gemini horoscope Ascendant, you actually seek the true meaning of your life, and you value meaningful interpersonal relations. member of an LLC that does business in California.
• It is a general partner in a partnership or limited partnership that does business in California.
• Any of the LLC”s members, managers, or other agents conducts business in California on behalf of the LLC. (Emphasis added)
For tax years that begin on or after January 1, 2011, a taxpayer is also doing business in California if any of the following apply:
• The casino online taxpayer is organized or commercially domiciled in California.
• Sales, as defined in subdivision (e) or (f) of R&TC § 25120, including sales by the taxpayer”s agents and independent contractors, in California, exceed the lesser of $500,000 or 25 percent online pokies of the taxpayer”s total sales.
• Real or tangible property of the taxpayer in California, exceed the lesser of $50,000 or 25 percent of the taxpayer”s total real and tangible property.
• The amount paid in California by the taxpayer for compensation, as defined in subdivision (c) of R&TC §25120, exceeds the lesser of $50,000 or 25 percent of the total compensation paid by the taxpayer.
For the preceding conditions, the sales, property, and payroll of the taxpayer include the taxpayer”s pro rata or distributive share of pass-through entities (R&TC § 23101(d)).
Regardless of where LLCs primarily conduct business, if any of their members, managers, or other agents conduct business in California on behalf of the LLC, the FTB considers the LLC as doing business in California (R&TC § 23101). [Go to ftb.ca.gov and search for doing business for more information.]
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. Paul conducts business in California on behalf of the LLC. The LLC must file Form 568.
Rachel is a California resident and member of an Oregon LLC. The Oregon LLC has a retail store in Oregon. Rachel uses a California address for the LLC”s tax filings and a California accountant to prepare the LLC”s tax returns. Rachel conducts business in California on behalf of the LLC. The LLC must file Form 568.
Sara 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”s Texas investments. Sara conducts business in California on behalf of the LLC. The LLC must file Form 568.
(The foregoing is taken from FTB Form 3556 LLC MEO 4-2011. For more information, go to www.ftb.ca.gov, and consult with your Attorney or tax professional.)