Anyone familiar with the California franchise tax rules for foreign entities?

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alexcr
Posts: 21
Joined: Wed Jun 21, 2017 5:50 pm

Anyone familiar with the California franchise tax rules for foreign entities?

Post by alexcr » Thu Apr 04, 2019 2:17 pm

I live in California. My consulting practice was registered as a Delaware LLC at the end of 2016. It's a sole proprietorship. I never registered my consulting practice, e.g. as a foreign entity, with the state of California.

When I'm doing my state taxes via TurboTax, I'm arriving at the following question...https://d.pr/i/QO7x6H. I suppose my consulting practice is a single member LLC, as it's an LLC with me as the only member. (Though I do have a federal EIN separate from my SSN.)

Obviously, I'd prefer to avoid having to pay the $800 franchise tax to California every year. I looked into this further and found this article...https://d.pr/EEx6We. With regards to the three conditions they list...

• While I'm based in California and have my home office here, I'm not sure if I'm necessarily "physically operating" here, as it's not like I have a storefront, factory, or warehouse. My clients are from all across the country and I'm mainly working remotely. I rarely if ever take meetings at my home office.
• My business doesn't have any employees, assuming I'm considered member/owner and not an employee.
• My business doesn't have any significant assets. We do have a bank account with Bank of America, which was set up with a local branch in the LA area.

Are any folks familiar with the California rules around this? What are your thoughts on how I should proceed? Am I in enough of a gray area to ignore this?
Last edited by alexcr on Thu Apr 04, 2019 2:31 pm, edited 1 time in total.

bryanm
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Re: Anyone familiar with the California franchise tax rules for foreign entities?

Post by bryanm » Thu Apr 04, 2019 2:22 pm

If I were to guess, I would say that California would probably consider you as "physically operating in California" purely based on having an office there, reinforced by the fact that you have banked in California. Personally, I would err on the side of caution and pay the $800. (I'm in a similar situation, but unarguably have an "asset" in California that generates revenues. I therefore pay the $800.)

cadreamer2015
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Location: North County San Diego

Re: Anyone familiar with the California franchise tax rules for foreign entities?

Post by cadreamer2015 » Thu Apr 04, 2019 2:22 pm

It doesn’t answer your question, but do you really need the LLC? I did not set up an LLC for my consulting practice in CA, in part to avoid the hassle and $800 fee to the Franchise Tax Board.
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Topic Author
alexcr
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Joined: Wed Jun 21, 2017 5:50 pm

Re: Anyone familiar with the California franchise tax rules for foreign entities?

Post by alexcr » Thu Apr 04, 2019 2:30 pm

cadreamer2015 wrote:
Thu Apr 04, 2019 2:22 pm
It doesn’t answer your question, but do you really need the LLC? I did not set up an LLC for my consulting practice in CA, in part to avoid the hassle and $800 fee to the Franchise Tax Board.
To be clear, I'm set up as an LLC in Delaware, not California. I created the LLC mainly for liability protection.

cadreamer2015
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Location: North County San Diego

Re: Anyone familiar with the California franchise tax rules for foreign entities?

Post by cadreamer2015 » Thu Apr 04, 2019 2:51 pm

Does your LLC really provide liability protection? In my case my attorney said an LLC would provide no liability protection from any actions I personally take as a consultant. In general my understanding is that a single member LLC with no employees does not provide any significant liability protection. Check with your own attorney, of course.
De gustibus non est disputandum

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MP123
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Re: Anyone familiar with the California franchise tax rules for foreign entities?

Post by MP123 » Thu Apr 04, 2019 7:20 pm

If you have a home office and a bank account in CA I assume the FTB will expect you to pay the $800.

You should probably also register as a foreign corporation too even if you're incorporated in Delaware.

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