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Q: What constitutes 'business' in California with respect to a foreign LLC? ( Answered 5 out of 5 stars,   5 Comments )
Question  
Subject: What constitutes 'business' in California with respect to a foreign LLC?
Category: Business and Money > Accounting
Asked by: grammatoncleric-ga
List Price: $24.00
Posted: 13 Apr 2005 11:50 PDT
Expires: 13 May 2005 11:50 PDT
Question ID: 508848
This question is for taxmama or anyone else who feels qualified (yes,
I know the disclaimer that GA doesn't offer tax advice...)

I'm considering forming an LLC in NV or WY and doing real estate
business primarily in AZ at the beginning.  Considering that the LLC
will be a member-managed entity and I live in California, what do I
need to do to ensure that California cannot reliably claim that the
LLC is doing business here in CA?

I assume I should have bank accounts set up in Nevada or Wyoming and
Arizona.  What else could constitute business here in CA?
-Does getting a loan in California = business in CA?
-Does talking on my phone from CA to manage my property manager in AZ
= business in CA?
-Does taking distributions from my LLC while living in CA = business in CA?

Request for Question Clarification by taxmama-ga on 13 Apr 2005 17:48 PDT
Dear Gramma,

Do you have enough information in the comments? 

Chapter 12 in Small Business Taxes Made Easy covers the concept of
'nexus' especially from the point of view of California, one of THE 
most aggressive states.

Many of the landmark cases, used by other states to collect taxes
from outsiders, were battles won by California. 

If you want me to answer you, please let me know. 
I'll reply after the 15th, if you don't mind.

But let me just remind you of one thing - no matter where
you incorporate (and yes, an LLC is a corporation, of sorts),
if it's a pass-through entity like an LLC or S-corporation, 
you'll be paying taxes on the income in California anyway. 

Best wishes

Your TaxMama-ga

Clarification of Question by grammatoncleric-ga on 13 Apr 2005 19:10 PDT
Hi Taxmama-ga,

I would love to have a full / complete answer on this.  Since the LLC
is a pass-through entity, I know I'll be paying taxes on it as long as
I live here...but do I also need to register the LLC with Calfornia as
a foreign corporation?

Please feel free to answer this after Friday. Note that if I get an
answer elsewhere before then, I'll cancel the question, but if it's
open - feel free to lock it and answer when you're available.

Grammaton Cleric
Answer  
Subject: Re: What constitutes 'business' in California with respect to a foreign LLC?
Answered By: taxmama-ga on 19 Apr 2005 05:09 PDT
Rated:5 out of 5 stars
 
Dear Grammaton Cleric,

Tax season (phase I) is over.

I can think again. Thanks for the breather.

OK, if I were in your shoes, this is what I would do:

1) I would incorporate the entity in AZ.
According to this summary of LLC's, there doesn't appear to be an annual fee:
http://www.nvinc.com/analysisllc.htm

If your entity is not based in AZ, you will have no standing
when/if you ever need to sue, enforce a contract, or collect
rents from tenants or to evict them. 

2) Contact info: 
a)All bank accounts and primary vendors will be in AZ.
This is not hard to do, since you are dealing with buildings.

b) All mail should go to an address in AZ. You could either have
your mail go to one of your buildings and have the manager
forward it all to you once a week; or you could have it all
go to a mail box service - and pay them to do the same. You can
probably rent such a box for about $15-$25 per month plus the
cost of forwarding the postage.  

c) The argument for paying the extra money to a mail box service, 
rather than the cheaper service of having a manager forward it? 
If you ever have a falling out with your manager, they can't 
hold your mail or checks hostage. In fact, have all your tenants 
MAIL their checks to that box address rather than give them to 
the manager. And get into the habit of sending them a receipt
with a notice printed on it - if you don't get a receipt within
10 days of your payment, please contact this office. That way, 
any time they don't get a receipt, you know the rent has been 
stolen. Sadly, yes, managers sometimes do that.

I know, I know, I am behaving as if terrible things will happen
to you. Unfortunately, they sometimes do. If you prepare for them, 
most likely, they'll never happen. If you don't - you'll be unable 
to protect yourself. 

c) Phone number - either get an AZ phone number and have it 
forwarded to your phone, or get a toll-free number and have it
do that. You can get them remarkably cheaply these days. 
I use a company called National Comtel which costs me 5 cents
per minute for the toll-free line. Regardless, having a California
phone number will mean you're operating that business in California.

3) As to loans, it doesn't matter where you get the loan. 
The loan will be secured against a building in AZ. 

4) There is no problem with your taking distributions in California.
After all, since an LLC is a pass-through entity, you will be reporting
the income/losses on your personal tax return in California anyway, 
as we discussed earlier. 

However....you will have to file a non-resident return in AZ to
report the income from the building. Even if you incorporated in
NV or WY or wherever, you'd need to register in AZ in order to do
business there. If you don't, see notes on point (1). 

As a landlord, you will have many instances where you will have
need of the courts. So, don't handicap yourself from the outset
by not registering within the state. 

As you move your investing into other states, do the same thing. 
Incorporate within each state so you're always in legal standing
locally. 

I hope this helps?

Best wishes

Your TaxMama-ga
grammatoncleric-ga rated this answer:5 out of 5 stars

Comments  
Subject: Re: What constitutes 'business' in California with respect to a foreign LLC?
From: alienintelligence-ga on 13 Apr 2005 13:37 PDT
 
Hi grammatoncleric,

It seems to be based on the legal and
financial doings of the business.

As long as all monies and legal affairs
are handled outside of California's
borders, you are not doing business
"in California"

Distributions = getting paid?

The loan question is tricky. I couldn't
find any info one way or the other with
a cursory search.

I'm sure with some more digging, another
researcher can come up with the answer
to that and validation of the "doing
business" issue. 

-AI
Subject: Re: What constitutes 'business' in California with respect to a foreign LLC?
From: alienintelligence-ga on 13 Apr 2005 13:42 PDT
 
I meant to include:

Corporations - The Legal Definition of Doing Business in California 
CALIFORNIA CODES 
CORPORATIONS CODE SECTION 191

[ http://www.companiesinc.com/doingbusinessincalifornia.asp ]

-AI
Subject: Re: What constitutes 'business' in California with respect to a foreign LLC?
From: alienintelligence-ga on 13 Apr 2005 13:57 PDT
 
Some case law:

The key phrase of  191(a) is "repeated and successive transactions .
. . in this state." The case law construing this phrase indicates that
a party can do business in California yet not be deemed to be
transacting intrastate business there.

For example, in Le Vecke v. Griesedieck Western Brewery Co., 233 F.2d
772 (9th Cir. 1956), a foreign brewery was deemed not to be
transacting intrastate business in California despite shipping a
considerable amount of its product to local distributors for
distribution in California and had its officers make several sales
promotion trips there. Despite these activities, the holding was based
on the fact that the brewery did not maintain an office or place of
business in California, did now own inventory or maintain a warehouse
there, had no salesmen or employees there, and did not maintain a bank
account, lend money, or ship on consignment to California.

Lastly, in West Publishing Co. v. Superior Court, 20 Cal. 2d 720, 128
P.2d 777 (1942), the California Supreme Court held that isolated
business transactions by a foreign corporation, such as mere
solicitation of business, advertising or demonstrating products, the
listing of the name of the corporation in the telephone book, or
having the name of the corporation on an office door, did not amount
to doing business in California.

Thus, if a foreign corporation limits its activities to items which
are deemed interstate rather than intrastate activity, it is not
"doing business" in California and does not need to register in
California under  2105(a). Cf. United Systems of Arkansas, Inc. v.
Stamison, 63 Cal. App.4th 1001, 74 Cal. Rptr.2d 407 (1998). However,
if the particular activity is deemed "intrastate business,"
registration pursuant to  2105(a) must occur.

One activity that almost invariably leads to a finding of "transacting
intrastate business" is the presence of employees or agents (as
opposed to independent contractors) in California. See, e.g., La
Vecke, supra; Mills Music v. Lampton, 40 Cal. App.2d 354, 104 P.2d 893
(1940); Milbank v. Standard Motor Constr. Co., 132 Cal. App. 67, 22
P.2d 271 (1933); Knapp v. Bullock Tractor Co., 242 F. 543 (D. Cal.
1917); Lawrence v. Ballau, 50 Cal. 258 (1875).



-AI
Subject: Re: What constitutes 'business' in California with respect to a foreign LLC?
From: jimmycparks-ga on 15 Jan 2006 09:41 PST
 
I'd just like to say alienintlligence-ga is so great! Thanks for
posting all that wonderful information.
Also, taxmamma is awesome too.
Subject: Re: What constitutes 'business' in California with respect to a foreign LLC?
From: jimmycparks-ga on 17 Jan 2006 14:32 PST
 
When I called the California Franchise Tax board to ask them about
what constitutes a "nexus" outside of CA they told me to read the
following:

http://www.ftb.ca.gov/forms/misc/1050.pdf

It doesn't answer everything, but it is a little helpful.

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