You May Be Doing Business In California Even When Not Transacting Intrastate Business

The Question

In this Legal Ruling issued on 1/1/11, the Franchise Tax Board addressed the question of whether a sole owner of a disregarded entity (i.e., a qualified Subchapter S corporation or single member limited liability company) is “doing business” in California if the owner has no activities in California other than those of its disregarded entity.

The Corporations Code

Corporate lawyers may be quick to point out that Corporations Code § 191(b)(2) & (6) provides that a foreign corporation will not be considered to be transacting intrastate business merely because of its status as either a shareholder of a foreign corporation transacting intrastate business or a member or manager of a foreign limited liability company transacting intrastate business.

The FTB’s Answer

In light of these provisions in the Corporations Code, corporate lawyers may be surprised to learn that the FTB has concluded that the activities of the disregarded entity will be considered activities of its owner. Thus, if the activities of the disregarded entity constitute “doing business” in California, the owner is also doing business in California due to its ownership of the disregarded entity. This means that the owner is required to file a California franchise tax return and pay the associated tax. An owner that fails to do so (unless the FTB’s Legal Ruling is successfully challenged) will be subject to penalties and interest.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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