California syndicators/operators and the FTB tax arm

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California syndicators/operators and the FTB tax arm

Bryan ZuetelPro Member
Attorney · Orange County, CA · Member since 2017 · 242 posts · 99 votes

Because of the long arm of the California Franchise Tax Board and what they consider doing business in California, my LLC will be deemed to be doing business in California, since I'm managing the LLC from California, even if if the property is located outside of California. By doing business in California, the LLC may be subject to the heavy LLC franchise taxes of California.

For any syndicators/operators based in California, have you faced any resistance from potential investors to the LLC being deemed doing business in California and paying California LLC franchise taxes?

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
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    @Bryan Zuetel

    I find it that most investor's will not care whether the fund pay's the California LLC Franchise tax. The minimum fee is $800. If the fund has 10 investors - the fee is $80 per person. Just factor it as a cost of doing business


    While California deems the LLC is doing business in California doesn't necessarily mean that the fund will have California state sourced income.

    If the LLC files a partnership return and all the payroll, property and sales are outside California - The LLC will not have any California state sourced income. As a result - the investors of the fund should get a California K-1 that is blank and they should not have a filing requirement with CA.

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  • Paul OBryan
    Investor · Los Angeles, CA · Member since 2017 · 43 posts · 9 votes
    8y

    @Bryan Zuetel @Basit Siddiqi Hey Guys, Thanks for this. I've been trying to figure it out myself. I am based in CA, have a Delaware LLC which is invested in a Nevada LLC (syndication). My Delaware LLC has a CA bank account attached to it and all three partners are in CA. I thought we were free from FTB taxes but we may not be because it looks like we are "doing business" in CA.

    BTW we did not register our DE LLC with CA but my tax returns will show what we are doing. Below is a link that makes the case against us, particularly this:

    In addition, an out-of-state LLC is "doing business" in California if:

    • The LLC is commercially domiciled in California (i.e., California is the place where realistic control of the LLC's functions is centered).

    https://www.corporatesecuritieslawblog.com/2014/07...

    I would love to hear your thoughts if you know otherwise.

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  • Bryan ZuetelPro Member
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    Attorney · Orange County, CA · Member since 2017 · 242 posts · 99 votes
    8y

    @Paul OBryan, after researching this issue,  I don't see an easy or ethical way around California's unreasonable definition of doing business in the state.  So, I would just bite the bullet and pay California the tax.

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