In a rare move in the favor of taxpayers, the California Court of Appeal recently issued a decision determining that passive business owners actually do not need to pay taxes to the California Franchise Board if the business is located out of state.
Everyone knows about the California Franchise Tax Board’s dreaded $800 minimum annual fee if you or your business is “doing business” in the State of California. (Cal. Rev. & Tax Code § 23151). This tax is required whether or not the company is incorporated in California or not. All that is required is that the business “does business” in California (whatever that means), and with that, the company must pay taxes to the State of California.
The best example of the absurd outcome that has on occasions resulted from the broadness of these requirements involves the case of Swart Enterprises, Inc., which was tax-slapped several years ago by the California FTB for not paying taxes on California income. Swart was incorporated in Iowa, operated a farm in Kansas, with no property, employees, or other business relationship to California. Swart’s only relationship to California was its status as an investor in a limited liability company located in California (a 2% ownership). Swart was not a manager of the California LLC, but in the FTB nonetheless took the position that Swart “did business” in California and was obligated to pay taxes to the State of California. Head-slap.
However, the passage of time has allowed justice to finally work its way into the picture. A decision by the California Court of Appeal reversed the ruling in favor of the FTB, and held that passively owning an interest in a California company does not constitute “doing business” in California.
Here’s what the judges had to say:
We are not persuaded Swart may be deemed to be doing business in California because it owns a 0.2 percent interest in a manager-managed LLC doing business in California. Swart’s only connection to California was a mere 0.2 percent ownership interest it passively held during the tax year the franchise tax was imposed. This interest closely resembled that of a limited, rather than general, partnership as evinced by the fact Swart had no interest in the specific property of Cypress LLC, it was not personally liable for the obligations of Cypress LLC, it had no right to act on behalf of or to bind Cypress LLC and, most importantly, it had no ability to participate in the management and control of Cypress LLC. Because the business activities of a partnership cannot be attributed to limited partners (Appeals of Amman & Schmid Finanz AG (1996) 96 SBE 008 (Amman & Schmid)), Swart cannot be deemed to be “doing business” in California solely by virtue of its ownership interest in Cypress LLC.
Hooray! A taxpayer-favorable decision comes so rarely out of any legal jurisdiction that the Court of Appeal’s decision is no doubt causing rejoice among investors across the nation. At the very least, it will save many investors the dreaded $800/year annual fees, especially for startups and businesses that might not always be making enough to pay distributions.
About Axis Legal Counsel
AXIS Legal Counsel’s Business Practice provides legal advice to numerous small businesses with a variety of legal matters, including business formations, contracts, deals, and transactions, business administration, corporate governance, operations, risk management / insurance, labor/employment matters, intellectual property, healthcare, crisis management, directors/officers, private/data security, technology, statutory/legal compliance, and business litigation. AXIS represents businesses, corporations, LLCs, LLPS, partnerships, and startups in need of a corporate lawyer, for business legal matters as well as business litigation, such as disagreements, non-solicit agreements, non-competes, trade secrets, and other disputes with businesses. We are also experienced in providing assistance to business clients concerning business contracts, corporate formation matters, contracts and transactions, business litigation, business legal advice for Corporations, LLPs, LLCs, Partnerships, Small Business, Startups, and others involving corporate law.
If you are seeking a business lawyer, or for information on retaining AXIS Legal Counsel to represent your business in connection with any legal matter, contact firstname.lastname@example.org or call (213) 403-0130 for a confidential consultation.
► MOBILE? Click HERE to Initiate Call Now
► ONLINE? Click HERE to Request Online
Top Business FAQs
- Founders Agreements: A Comprehensive Guide
- Basics of Non-Disclosure Agreements
- The Rare Taxpayer Win: California Court of Appeals Rules Passive Investment in California Entity Does Not Constitute “Doing Business” in California
- Top Tax Tips for California Small Businesses
- How to Deal with Overly Political Employees
- California Sample Template Rest Break Policy 2017
- California Employers’ Guide to Rest Break Laws
- California On Duty Meal Period Waiver Form 2017 – Download Sample Template
- California Meal Break Waiver Form 2017 – Download Sample Template
- California Meal Break Laws for Businesses: Overview and FAQs
Latest Business Representations
- Technology Infrastructure Company Axis Legal Counsel for Business Operations Matter
- Los Angeles Technology Infrastructure Services Provider retains Axis Legal Counsel for Employment and Labor Guidance
- Technology Solutions Company Hires Axis Legal Counsel to Pursue Business Litigation Dispute
- Digital Media Services Startup Hires Axis Legal Counsel
- Technology Marketing Company Retains Axis Legal Counsel for Client Services Contract Transactions
- Axis Legal Counsel Hired in Accountant Malpractice Litigation
- Axis Hired by LA’s Leading Immersive Experience Entertainment Company
- Axis Legal Counsel Hired by Limited Partner against Wrongful Conduct of General Partner in Limited Partnership (LP) Dispute
- Los Angeles Internet Marketing Business Hires Axis Legal Counsel for Business Dispute Involving Services Contract
- Los Angeles Tattoo Shop Hires Axis Legal Counsel in Shareholder Dispute
Startups | Business Disputes | Litigation | Charities | Non-Profits | Contracts and Transactions | Technology and Internet | Insurance Recovery | Intellectual Property | Privacy | Crisis Management | Los Angeles Business Lawyer | Los Angeles Startup Lawyer | Los Angeles Articles of Incorporation Lawyer | Los Angeles Business Contract Lawyer | Los Angeles Corporate Formation Lawyer | Los Angeles Contract Lawyer | Los Angeles Business Litigation Attorney | Los Angeles Small Business Lawyer | Los Angeles Corporate Lawyer | Los Angeles LLP Lawyer | Los Angeles LLC Lawyer | Los Angeles Partnership Lawyer | Los Angeles Non-Solicit Lawyer
Los Angeles Non-Compete Lawyer | Los Angeles Dog Cafe Lawyer | California Dog Cafe Attorney | Venture Capital Finance | Executive Compensation Agreement Attorney Los Angeles