[a]n extension of time to file is not an extension of time to pay.” The LLC Fee plus NCNR taxes are due by the original date. The completed form FTB 3537 is to be sent to:
Franchise Tax Board
PO Box 942857
Sacramento, CA 94257-06051
Other Income Forms
Form FTB Schedule IW is a portion of form 568, and reflects the total income arising from California. This includes gross income plus cost of goods sold. “LLCs with ownership interest in pass-through entities must report their distributive share of the pass-through entities’ ‘total income from all sources derived from or attributable to this state.’” The distributive share includes the cost of goods sold and deductions from gross income. Disregarded entities should also use this form to calculate total income.
California Schedule K-1 (568) is for LLCs that are classified as a partnership for tax purposes. This schedule reports each member’s share of various aspects of the LLC. This schedule is accepted through a CD, diskette, or cartridge. More information can be found through a K-1 search at the California Tax Board website.
FTB Publication 1060 provides guidance for LLCs classified as corporations which are looking for assistance in calculating income.
Forms for Nonresident Members
Form FTB 3832 is relevant for LLCs with nonresident members. “The FTB 3832 must have each nonresident member’s signed consent to California’s jurisdiction to tax the member’s distributive share of the LLC’s income attributable to California sources.” If the LLC fails to receive consent of the nonresident member, then the LLC is obligated to pay tax on the member’s share of California income at the member’s highest tax rate. Form FTB 3832 is not necessary, however, if the LLC is a disregarded entity (single member LLC). This is because the single member LLC consents to California tax when it signs the “Single Member LLC Information and Consent” section of Form 568.
Schedule T on Form 568 is used to calculate the NCNR members’ taxes which the LLC must pay. Additional information for Schedule T can be found on Form 568.
R&TC Section 18535 allows nonresident members of an LLC to choose to file a group nonresident tax return. Publication 1067 provides information and guidance when electing to do so.
To allow series LLCs formed in states other than California, the formation state must have certain qualifications.
“[T]he laws of their formation state provide for the designation of multiple series of interests in the LLC and:
- The holders of the interests in each series are limited to the assets of that series upon redemption, liquidation, or termination and may share in the income only of that series.
- Under the law of the formation state, the payment of expenses, charges, and liabilities of each series is limited to the assets of that series.”
Regarding the annual tax and LLC fee, each individual series in the series LLC is a separate LLC. Therefore, each series must file a Form 568, pay an annual tax and pay an LLC fee.
Bills, Notices and Penalties for an LLC
All three classifications of LLC are able to be billed for taxes and fees which are unpaid. Additionally, certain notices will be sent to an LLC, depending on the filing situation.
If the LLC does not show the correct annual tax, the correct LLC fee or the correct NCNR member tax, a Return Information Notice is sent This same notice is also mailed to LLCs designated as corporations if that LLC does not show the correctly estimated tax. If the LLC fails to pay any of these fees/taxes (as opposed to showing the correct value), the LLC will be sent a Notice of Balance Due. The LLC designated as a corporation will receive this notice if it does not pay the estimated tax. Finally, all classifications of LLCs will receive a Past Due Notice if the LLC has any taxes, penalties, or interest that remains unpaid 45 days after the first notice date.
Penalties will be assessed LLCs in several circumstances. These situations include: if the LLC pays a tax or fee (including estimated LLC fee) late, if the LLC underpays a tax or fee (including estimated LLC fee) or if the LLC files their tax return later than the extended due date. The underpayment penalty falls under R&TC Section 19132, the late payment penalty falls under R&TC Section 19131 and the late filing penalty falls under R&TC Section 19172.
Suspension, Forfeiture and Cancellation of an LLC
The rights and privileges of an LLC may be suspended/forfeited if the LLC does not file Form 568, or if the LLC does not pay any taxes, penalties or interests which are due. If the LLC is domestic, the rights of the LLC are suspended. If the LLC is foreign, the rights are forfeited. In addition to the rights privileges and powers being suspended /forfeited, if the LLC enters into a contract during this period of time, the contract is voidable by any party other than the suspended/forfeited LLC. The contracts will remain this way until the LLC applies for relief, and the FTB grants the requested relief. R&TC Sections 23301, 23305.1, and 23305.2 provide more information regarding this process.
To cancel an LLC, Form LLC-4/7 must be filed with the California Secretary of State. Form LLC-4/7 is effective on the same day of filing with the Secretary of State If domestic, the LLC must also file Form LLC-3 with the Secretary of State. Form LLC-3 is not required, however, if a dissolution of the LLC is ratified by a vote of all members. The $800 annual tax is required until the following steps are taken.
- The LLC files a tax return designating to the Franchise Tax Board as it’s final tax return.
- The LLC files a timely tax return with the Franchise Tax Board
- The LLC pays $800 for the annual tax of its final tax return
- The LLC does not conduct business in California following the final day of the tax year as stated in the final tax return
- The LLC files Form LLC-4/7 within 1 year of the filing of it’s final tax return.
FTB Publication 1038 provides more information about how to cancel an LLC.
A domestic LLC, organized after January 1, 2004, is able to file Form LLC-4/8. This form allows for a short form cancelation. To be able to file Form LLC-4/8 though, many conditions must exist. The requirements are:
“It files California SOS Form LLC-4/8, Limited Liability Company Short Form Cancellation within 12 months after filing its Articles of Organization.
It does not have any debts or other liabilities (other than LLC tax liabilities).
It has filed or states it will file a timely final annual LLC tax return.
All of its known assets have been distributed to the persons entitled to them, or it did not have any known assets.
It has not conducted any business since filing its Articles of Organization.
A majority of the managers or members, or if there are no managers or members, the person or a majority of the persons who signed the Articles of Organization, vote to dissolve the domestic LLC.
If the LLC received payments for interests from investors, those payments have been returned to those investors.”
Form LLC-4/8 is to be filed with the California Secretary of State. If done so properly, the LLC will not be forced to pay the $800 annual tax, but will also not be eligible for reimbursement of any taxes or fees paid prior to the cancellation.
Constitutionality of the LLC Fee and Protective Claims
There have been four cases which have been filed that challenge the calculation of the LLC Fee under R&TC Section 17942. These cases are:
- Northwest Energetic Services, LLC v. Franchise Tax Board
- Ventas Finance I, LLC v. Franchise Tax Board
- Bakersfield Mall, LLC v. Franchise Tax Board
- CA Centerside II, LLC v. Franchise Tax Board
Each of the four cases has their own unique factual circumstance. Furthermore, the first two cases listed (Northwest & Ventas) are final. It may behoove the LLC, if their statute of limitations is open, to file a protective claim. This allows for a refund, per action on the pending litigation. Also, if your LLC has essentially the same fact pattern as Northwest or Ventas, the LLC may be entitled to a refund. To see if your LLC is eligible, go to the California Franchise Tax Board’s website, and search for “FTB Notice 2008-2” or “FTB Notice 2009-04”.
In order to protect an LLC’s statute of limitations regarding a claim, they may file a protective claim. This protective claim can be pending the outcome of a court case, an IRS audit (or any other CA taxing agency), an appeal to the State Board of Equalization, or any other litigation. If the protective claim is regarding Bakersfield or Centerside, the claim must have certain information. First, there must be a statement that “This is a protective claim.” Second, the claim must include the LLC name, address and identification umber. Third, the claim must state the tax years in which the LLC is looking to be refunded. Fourth, there must be a description of the issue. Fifth, the refund amount being claimed (should be the same as the fee paid by the LLC). Finally, the claim must have basic information of a person to contact. In addition to these six requirements, the protective claim needs to be signed by the LLC’s managing member or a representative with power of attorney. The protective claim can be sent by fax, mail or courier.
Federal State Special Audit Section MS F340
Franchise Tax Board
PO Box 1998
Rancho Cordova, CA 95741-1998