Tax Issues

Sending Copies of LLC Tax Returns to Members of a California LLC

Question:  I am a member of a California LLC, am I entitled to get a copy of my LLC’s federal income tax return?

Answer:  It depends.  If the LLC has 35 or fewer members California Corporations Code Section 17704.10(e) requires that all members be given copies of the LLC’s federal, state and local income tax return for the year.  Section 17704.10(e) states:

The limited liability company shall send or cause information to be sent in writing to each member or holder of a transferable interest within 90 days after the end of each taxable year the information necessary to complete federal and state income tax or information returns and, in the case of a limited liability company with 35 or fewer members, a copy of the limited liability company’s federal, state, and local income tax or information returns for the year.

By | 2016-12-13T21:20:06+00:00 May 3rd, 2015|Categories: CA Law, CA LLC Statutes, FAQs, Operating LLCs, Tax Issues|0 Comments

What’s a California Franchise Tax Board Form 3832?

Question:  My California LLC generates income from its business inside California.  One of the members is a nonresident of California and another member is a company formed in a state other than California.  I heard that my California LLC must file a California Franchise Tax Board Form 3832.  Is that true and if if so, what is the Form 3832?

Answer:  If your California limited liability company is taxed as a partnership for U.S. income tax purposes then it must file an FBT Form 3832 with the California Franchise Tax Board when it files its first FBT Form 568. The completed FTB Form 3832 must contain the following:

  • The names and social security numbers (SSNs), individual taxpayer identification numbers (ITINs), or federal employer identification numbers (FEINs) of all members that are people who are not residents of California and companies that are not formed in California.
  • The signature of each nonresident member evidencing member’s consent to the jurisdiction of the State of California to tax that member’s distributive share of income attributable to California sources. If the nonresident member has a spouse or registered domestic partner (RDP), the spouse / RDP must also sign the Form FTB 3832.
Anytime an existing California LLC acquires a member that is not a resident of California the LLC must obtain the nonresident’s consent and consent of the nonresident’s spouse or RDP if the nonresident is married and file the FTB Form 3832 with the LLC’s tax return for the year in which the nonresident acquired his/her/its membership interest.
Note:  By signing and submitting the FTB Form 3832 to the California Franchise Tax Board, the nonresident member is alerting the FBT that it should expect the nonresident member to file an annual California income tax return and pay tax on all income earned by the LLC from inside California.
Warning:  If a member fails to sign form FTB 3832, the LLC must pay tax on the member’s distributive share of income at that member’s highest marginal rate.  Any amount paid by the LLC will be considered a payment made by the member.
By | 2016-12-13T21:20:13+00:00 April 12th, 2015|Categories: FAQs, Franchise Tax Board, Tax Issues|0 Comments

New IRS Procedure to Get EIN for an LLC Owned by a Nonresident Alien

Question:  I am a not a U.S. citizen and I live outside the U.S., aka a “nonresident alien.”  I formed a limited liability company in the U.S.  How do I get a federal employer id number (EIN) for my LLC?

Answer:  You can get the EIN one of two ways:  the easy way or the not so easy way. Before January of 2014 we could get an EIN for an LLC we formed for a nonresident alien if the nonresident alien completed and signed an IRS form SS-4 that designated my legal assistant as a third party designee authorized to contact the IRS and get the EIN.  My legal assistant would call the IRS international EIN number, fax the SS-4 to the IRS agent and spend about 45 minutes on the phone, but at the end of the call the IRS would give my legal assistant the EIN.

Beginning in January of 2014, the IRS canned that procedure.  Now a company of any type owned by a nonresident alien gets an EIN for the company by one of the following two methods:

You should be able to get the EIN for the new LLC by using the IRS’
online wizard here:

Easy Way: If the nonresident alien has an IRS issued International Taxpayer Identification Number (ITIN), the nonrsident alien can obtain the EIN in a 5 – 10 minute data entry session using the IRS’ online EIN wizard.  After submitting all of the information the website will display the EIN.  Be sure to print the page with the EIN and keep it in a safe place.

Hard Way:  If the nonresident alien does not have an ITIN then he or she must complete and sign an IRS form SS-4 and fax or mail it to the IRS.  Faxing the SS-4 to the IRS is the better method because the IRS will fax the EIN to the applicant in approximately four business days vs. three to four weeks if the SS-4 is mailed to the IRS.  Prepare, sign and fax the IRS form SS-4 to the IRS at 859-669-5760.

To get a partially completed IRS form SS-4 for an LLC and my detailed instructions on how to fill out the form read my article called “How to Complete IRS Form SS-4.”  Be sure to delete all the text at the bottom of the form in the Third Party Designee Fields and insert your name, phone number and fax number at the bottom of the form.

By | 2017-10-05T10:38:16+00:00 June 5th, 2014|Categories: CA LLC Formation, FAQs, How Do I, Tax Issues|0 Comments

If My New Business Will Have Start Up Losses, Should It be an LLC or an S Corporation?

Question: I am considering starting a new business and I anticipate that it will produce losses, rather than profits for the first few years. Should I form a limited liability company or an S corporation to own and operate the business?

Answer: People ask this question of me a lot, but this question mixes the type of entity formed under state law with a method of federal taxation under the Internal Revenue Code of 1986, as amended. When you are thinking of forming an entity in California to operate a business or to own investment real property, the first question is what type of entity should I form under California law? More often than not the answer is a limited liability company.

After you form your company, the next question is what is the best method of income tax for the entity? If your tax advisor says that your LLC should be taxed as an S corporation and if it is eligible for that method of tax, then all of the members of company must sign an IRS Form 2553 (see the instructions) and file it with the Internal Revenue Service before the deadline for making the S corp election.

An LLC taxed as an S corporation is a “pass through” entity (it does not pay income taxes), which means that losses are passed through to the owners who can deduct the losses on their personal income tax returns (if they have sufficient basis).  Note: An LLC that elects to be taxed as a C corporation, an S corporation, a sole proprietorship or a partnership for federal income tax purposes does not change its character. The entity always remains an LLC created under California law regardless of the method of federal income tax applicable to the entity.

Bottom line: If S corp tax treatment is important and your business is in California, form a California LLC and cause it to be taxed as an S corporation by filing an IRS form 2553 in the first 75 days after forming the LLC.

P.S.  I recommend that everybody who forms an LLC consult with a good tax advisor as soon as possible after forming the entity to obtain advice on which of the four federal income tax methods (sole proprietorship, partnership, C corporation or S corporation) is best for the limited liability company. The election to change the default method of income tax (sole proprietorship or disregarded entity for a single member LLC or partnership for a multi-member LLC) must be filed within 75 days of the date of forming the LLC for the election to be effective from the date of formation.

By | 2016-12-13T21:20:16+00:00 January 2nd, 2014|Categories: CA LLC Formation, FAQs, Tax Issues|0 Comments