Delaware LLCs required to pay taxes in California

Delaware LLCs required to pay taxes in California

Many limited liability companies (LLCs) are formed under non-CA law (often Delaware), even if they are managed from California, to obtain the perceived benefits of Delaware law. The downside of filing in California is the $800 per year minimum franchise taxes.

The Franchise Tax Board (FTB) has always taken the position that a foreign LLC that has California managers is “doing business” in California and must file a California income tax return.

In one case, the LLC had all of its business activities in Montana real estate; nevertheless, because its managers were in California, the court held that the LLC was subject to California tax and reporting requirements. The FTB is now imposing a $2,000 annual penalty for each tax filing failure.

Note that the passive holding of a membership interest would not enough to attract a California filing requirement if the California member does not have management rights and the LLC is not otherwise doing business in the state.

Absent that scenario, given the FTB’s position, any LLC with California managers would be well advised to register to do business in California and pay its minimum taxes.

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Roger Royse

Roger Royse, the founder of the Royse Law Firm, works with companies ranging from newly formed tech startups to publicly traded multinationals in a variety of industries. Roger regularly advises on complex tax structuring, high stakes business negotiations and large international financial transactions. Practicing business and tax law since 1984, Roger’s background includes work with prominent San Francisco Bay area law firms, as well as Milbank, Tweed, Hadley and McCloy in New York City.
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