An out of state LLC with a California Member may be considered “doing business” in California or Maybe Not!
The California Franchise Tax Board (FTB) has long taken the position that any out of state Limited Liability Company (LLC) that had a California resident as a member was considered doing business in California. This was the FTB position regardless of the amount of ownership interest.
Then came, Court of Appeal Decision, “Swart Enterprises, Inc. v. Franchise Tax Board”.
FTB releases FTB NOTICE 2017-01
On January 12, 2017, the Court of Appeal issued a published decision in Swart Enterprises, Inc. v. Franchise Tax Board (Cal. App. 5th Dist. 2017) 7 Cal. App. 5th 497 (“Swart”). In this case, the court held that Swart Enterprises, Inc., an Iowa corporation (the "Iowa Corporation"), was not doing business in California and therefore was not subject to the $800 minimum franchise tax that the Franchise Tax Board had assessed.
In Swart, the Iowa Corporation held a 0.2 percent membership interest in a manager-managed California LLC that was doing business in California. The Iowa Corporation acquired its 0.2 percent membership interest in the California LLC after the original members made the decision for the California LLC to be manager-managed. The original members delegated to a sole manager full, exclusive and complete authority to manage and control the California LLC. The Iowa Corporation’s sole connection to California was its above ownership interest in the California LLC.
Click link for full notice:
FTB may still send a notice asking for a California return, don’t automatically assume you are required to file. Let’s talk about it, firstname.lastname@example.org.