Press Room: Tax Release

August 05, 2014

The Golden Bear Mauls LLC Members

In recently released Legal Ruling 2014-01, the California Franchise Tax Board (FTB) stated their view as to when “business entity” members of an LLC will be required to file California income tax returns. (Business entities for this purpose mean all taxpayers, except individuals.)

The FTB concluded that if the LLC is doing business in California, i.e., not just merely registered to do business, but meeting the statutory definition of “doing business” under the Revenue and Taxation Code, the members of the LLC are themselves doing business in the state and thus required to file California income tax returns – regardless of whether the LLC is member-managed or manager-managed.

In reaching its conclusion, the FTB distinguished an earlier case holding that an out of state corporate limited partner whose only contact with California was the ownership of an interest in a limited partnership doing business in the state was not considered to be doing business in California. The FTB based its conclusion in the Legal Ruling on the fact that an LLC member (unlike a limited partner) has the statutory right to manage and conduct the LLC’s business.

The practical effect of the FTB legal ruling is that business entity members in alternative investment fund LLCs will be much more likely required to file California income tax returns.

While a business entity investor may have no other business activities in California other than being a member of an LLC doing business in California, the LLC member (investor) must file an income tax return in California and, at a minimum, remit the $800 minimum tax.