Discussion:Entity Madness!

Still with me?

The operations LLC and Shell 1 would be treated as disregarded entities, but does this cause both shells to have nexus with CA and thus be subject to the CA LLC tax? I've got a sinking feeling that it does.

The same thing would happen if they were Q-Subs, right?

Thanks for the second look!

Sandy

I also do not see why you think the Shell 1 LLC and the operation LLC are going to be considered disregarded entities. If Shell 2 is a two member LLC which owns Shell 1 LLC - is not Shell 1 LLC also owned by these two Shell 2 LLC members? same with the operations LLC?

As for multi layed LLC's, there is an LLC worksheet which is part of CA Form 568. If the operations LLC has an LLC fee (not the $800 minimum tax) and that income flows to Shell 1 and then to Shell 2 - Shell 1 and Shell 2 will use the LLC worksheet so the gross receipts are not doubled up which would cause the LLC fee to be computed twice on the same gross receipts.

I'm not sure I follow your conclusion re ownership. Disregarded entities only apply if the 100% owner is an individual or corp?

It was you who stated that the operations and Shell 1 LLC's would be treated as disregarded entities - that I do not follow. Without doing research on that, I would think they would need to both file Federal 1065's as well as the CA 568's unless they had elected to be treated as corps which would then require 1120's.

I followed the bouncing ball - so okay Shell 1 and the operations LLC are disregarded entities - lesson learned.

Care to comment on the LLC fees and nexus to CA?

Dingodile - Unless Shell 2 and Shell 1 LLC were to generate some type of gross receipts (which in this post TinCook says they do not) they would not be subject to the LLC Fee. Only the annual $800 minimum tax. If you take a look at the LLC Income Worksheet you'll be able to see that one would enter as a negative number "any allocations, distrubutions, or gains from another LLC that was already subject to the LLC fee". The LLC fee (in addition to the $800 annual tax) would be a liability of the operations LLC if their annual income was greater than $250k. All three LLC's will need to file a CA 568.

On the plus side, we got the Operations LLC paid up before the due date. It looks like we're going to do a remedial S/QSub election, so hopefully we'd get the first year exemption from the franchise tax.

An other option would be to "regurgitate" the Operations LLC to the individual members, but that conflicts with their asset protection.

I wonder about the definition of doing business. The other two companies don't do anything, there's nothing to do for them. The members haven't even written a single check for them (they don't even have a bank account) since they paid the filing fee while living in NV. Gonna have to spend some time with CARTC §23101.

"The FTB says: * A nonregistered foreign LLC that is a member of an LLC doing business in California — or is a general partner in a limited partnership doing business in California — is considered doing business in California and must file an LLC return on Form 568, LLC Return of Income. In this case, the nonregistered foreign LLC is subject to the annual tax and fee."

I think we are all agreed now that the operations LLC (Ops) and LLC1 are both disregarded entities; each is an LLC with a single member, the LLC above it. Assuming that none of these entities has elected to be taxed as a corporation, LLC2 is taxed as a partnership, and LLC1 and Ops are disregarded entities, treated for tax purposes as part of LLC2. LLC2 files a federal 1065 including everything.

The same applies for California purposes; LLC2 will file a 568 reporting the total activity and pay the minimum tax and the fee, which will be based on Ops's gross receipts (which are, for tax purposes, LLC2's gross receipts). However, Ops and LLC1 each must also file Form 568 and pay the $800 minimum tax. The fee applies only once. (That would be true even if the gross receipts were reported on Ops's 568; gross receipts that have already been subject to the fee are not subject again when they flow up to the next level.)

It sounds as though somebody thought they could convert Ops's California source income to Nevada income by running it through a chain of Nevada LLCs. Even if the individual members of LLC2 were Nevada residents, the FTB's position would be that the parent and grandparent LLCs were California taxpayers, as Michael's quote from Spidell indicates. The fact that the individuals are now California residents and presumably do whatever they do on behalf of LLC2 and LLC1 in California only reinforces the FTB's position. So this savvy state tax planner has succeeded in saddling this business with $1,600 of unnecessary annual minimum taxes. I would suggest unwinding this structure ASAP.

I'm certain that this strategy was not motivated by tax avoidance, at least on the client's part. The client fell hard for asset protection by "diversification" once the attorneys got ahold of them. The client was surprisingly blase about the extra 1,600, so I think I'll raise my fee.

My client, the paralegal at the registered agent place they use, and I are meeting next week, so hopefully we can get some of these issues straightened out.