| The question of California registration comes up | | | | or (iii) securing or collecting debts or enforcing |
| often when foreign limited liability companies are | | | | mortgages. |
| used as holding companies for California legal | | | | California law makes it clear that foreign limited |
| entities, or own passive assets in California like | | | | liability companies are not transacting intrastate |
| bank accounts and non-income producing real | | | | business in California solely because they are |
| estate. In publication 3556, and in practice, the | | | | members of California limited liability companies, |
| FTB has adopted a position that virtually every | | | | nor are foreign limited liability companies |
| foreign limited liability company, especially one with | | | | transacting intrastate business in California |
| a California resident manager or managing | | | | because their managers or members live in |
| members should register with California and pay | | | | California or conduct meetings in California. The |
| California taxes. The FTB, again, is wrong. | | | | FTB would have to show that the manager or |
| California's jurisdiction to require an out-of-state | | | | the managing member actively transacts the |
| limited liability company to register as foreign | | | | LLC's business within California. |
| limited liability company with the State of California | | | | Even if a foreign limited liability company is not |
| is limited by the Due Process Clause of the 14th | | | | required to register with the State of California it |
| Amendment and the dormant Commerce Clause. | | | | may still be subject to the California franchise tax |
| Under the Due Process clause California would | | | | if the LLC is doing business in California. "Doing |
| have to show that the foreign limited liability | | | | business" has been defined as "actively engaging in |
| company has "minimum contacts" with California, | | | | any transaction for the purpose of financial or |
| and under the dormant Commerce Clause, | | | | pecuniary gain or profit." |
| California would have to establish a "substantial | | | | The California State Board of Equalization has |
| nexus" between the foreign limited liability | | | | ruled that passive ownership of an interest in a |
| company and California. | | | | California legal entity does not rise to the level of |
| Even if a foreign LLC meets the above | | | | "actively" engaging in a transaction. The SBE |
| requirements of the Due Process Clause or the | | | | based its decision on the fact that a limited |
| dormant Commerce Clause that only allows | | | | partner in a limited partnership cannot, based on |
| California to subject that foreign LLC to its | | | | the relevant provisions of partnership law and the |
| income tax jurisdiction. Having nexus with | | | | limited partnership agreement, participate in the |
| California would not be sufficient to require the | | | | active management of the partnership. Only the |
| foreign LLC to register with the State of California | | | | general partner may do so. The SBE's logic is |
| or to be liable for franchise taxes in California. | | | | equally applicable to members of a limited liability |
| California imposes a registration requirement on | | | | company who are not managers and who by the |
| foreign LLCs only if they transact business within | | | | provisions of the operating agreement are |
| California: "Before transacting intrastate business in | | | | precluded from participating in the active |
| this state, a foreign limited liability company shall | | | | management of the LLC. |
| register with the Secretary of State." | | | | It should be noted that a corporation that is a |
| The Corporations Code defines the term | | | | holding company (organized for the purpose of |
| "transact intrastate business" as entering into | | | | holding interests in other legal entities) is not |
| repeated and successive transactions of business | | | | deemed (per the Revenue and Taxation Code) to |
| in California, other than in interstate or foreign | | | | be doing business in California. The same provision |
| commerce. | | | | was not included by the legislature in the LLC |
| Being a member or a manager of a California LLC | | | | franchise tax statutes, but one can draw an |
| or a foreign LLC is excluded from the meaning of | | | | inference that LLCs that are solely holding |
| "transact intrastate business." Similarly excluded | | | | companies are not doing business in California. |
| are (i) holding meetings of managers or members | | | | Our advice, do not follow the FTB's instructions |
| or carrying on any other activities concerning the | | | | blindly. They are frequently self-serving and |
| LLC's internal affairs; (ii) maintaining bank accounts; | | | | without a legal foundation. |