California Registration Requirements For Foreign LLCs

The question of registering in California is often raised when foreign limited liability companies are used as holding companies for California legal entities or bank accounts and non-income real estate such as their inactive assets in California. In Release 3556, and in practice, the FTB has adopted a position that virtually every foreign limited liability company, especially one with California resident directors or board members, must register in California and pay California taxes. FTB, again, is false.

California’s jurisdiction requires a foreign limited liability company, registered as a foreign limited liability company with the state of California, subject to Article 14 of the Reform Agreement and the Inactive Business Clause. Under the due date, California must state that the foreign limited liability company has a “minimum contact” with California, and under the passive trade clause, California must establish a “significant relationship” between the foreign limited liability company and California.

Even if a foreign LLC company complies with the above-mentioned requirements or the passive trade clause that only allows California to deliver that LLC to its income tax jurisdiction. Collateral with California will not be sufficient for foreign companies to register in the state of California or assume California tax liability.

California requires foreign LLCs to operate in California only: “Prior to trading in the state, a foreign limited liability company must be registered with the Secretary of State.”

The company code defines the term “interstate commerce”, which includes, in addition to international or foreign trade, frequent and repeated business transactions in California.
Becoming a member or managing a company LLC or a foreign LLC is a “cross-trade”. It is no exception. Likewise, (i) the conduct of meetings of directors or members or any other activity related to the internal affairs of the LLC is reflected. (B) Maintenance of bank accounts. Or (iii) providing or collecting or pledging a loan.

California law makes it clear that foreign limited liability companies do not only trade in California because they are members of California limited liability companies and also do not operate foreign limited liability companies in California. Because managers or their members live in California or hold meetings in California. The FTB must indicate that the director or CEO is actively trading LLC in California.

Even if an overseas limited liability company does not need to be registered in the state of California, if the LLC is doing business in California, it may still be subject to the California franchise tax. “Doing business” is defined as “actively participating in any transaction for the purpose of financial or economic gain.”

The California State Balance Board has ruled that the passive ownership of the interests of a California legal entity does not increase to the level of “activation” in the transaction. The SBE made the decision that a limited partner cannot participate in the active management of a partnership in a limited partnership based on the limited provisions of the Partnership Act and the Limited Partnership Agreement. Only the public partner can do this. The SBE reason applies equally to members of a limited liability company who are not directors and are prohibited from engaging in active management of the LLC in accordance with the terms of the operating agreement.

It should be noted that a company that is a holding company (organized to protect the interests of other legal entities) is not intended (in accordance with the Income and Tax Code) to conduct business in California. The LLC franchise tax statute did not include statutory provisions by the legislature, but it can be concluded that LLCs that own only companies are not traded in California.

We recommend not blindly following the FTB instructions. They are often self-made and without a legal basis.

For a deeper analysis of these issues, read a more detailed version of this article on our website: http://www.maximumassetprotection.com

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