State Taxation of Limited Liability Companies and Partnerships considers the state tax treatment of these hybrid entities that combine the liability protection of a corporation with the pass-through treatment associated with classification as a partnership. Written by Phillip L. Jelsma, Esq., Luce Forward, the first part of this Portfolio explains the advantages and disadvantages related to choosing the limited liability company form over other forms of business entities, including general and limited partnerships, S corporations, and C corporations. The Portfolio also discusses the federal tax classification of LLCs and LLPs, an important topic since many states base their treatment of the entity on its classification for federal tax purposes. This discussion walks the reader through each of the six corporate characteristics that determine whether a business entity is classified as an association or as a corporation, providing references to pertinent Private Letter Rulings throughout.
The second section of this Portfolio contains analyses of the LLC and LLP statutes of each state that recognizes these entities. The material is presented on a state-by-state basis and includes such topic areas as:
References to applicable statutory provisions are provided.
Finally, State Taxation of Limited Liability Companies and Partnerships includes two tables in the Working Papers section that list Internal Revenue Service Private Letter Rulings relating to the classification of both domestic and foreign LLCs and LLPs.
State Taxation of Limited Liability Companies and Partnerships allows you to benefit from:
This Portfolio is part of the Premier State Tax Library, a comprehensive series, which covers major state tax transactions and issues with expert, in-depth analysis, and offers commentary on a wide range of multi-state and state-specific taxation topics, including Sales and Use, Corporate Income, Individual Income, Property, Gross Receipts, Limitations on States' Authorities to Tax, Credits and Incentives, Electronic Commerce, Mergers and Acquisitions, Procedure and Administration, Special Industries, and more.
Detailed Analysis
1560.01. INTRODUCTION
A. Defining the Limited Liability Company
B. Defining the Limited Liability Partnership
C. Advantages Over Other Forms of Business Entities
1. Advantages Over General Partnerships
2. Advantages Over Limited Partnerships
3. Advantages Over S Corporations
4. Advantages Over C Corporations
D. Disadvantages of LLPs and LLCs
1. Marginal Income Tax Rates
2. Passive Activity Rules
3. Cash Method of Accounting
4. Taxable Year
5. Fringe Benefits
6. Section 708 Terminations
7. Unrelated Business Taxable Income
1560.02. FEDERAL TAX CLASSIFICATION OF LLCS AND LLPS
A. Introduction
B. Centralized Management
C. Limited Liability
D. Free Transferability of Interest
E. Continuity of Life
F. Revenue Procedure on Classification (Pre-1997)
1. LLC Classification
2. Corporate Characteristics
a. Continuity of Life
b. Free Transferability of Interests
c. Centralized Management
d. Limited Liability
G. Post 1996 Classification Criteria
1. Introduction
2. History
3. Application
H. State Classification
1560.03. CONSEQUENCES OF CLASSIFICATION
A. Treatment of LLC or LLP Classified as a Partnership
1. Formation of the LLC
B. State Taxes Imposed on LLCs
1. Obligation of LLC to File State Returns
2. Obligation of Members to File Federal and State Returns
3. Special Rules for Nonresident Corporate Members
4. Treatment of Nonresident Members - Corporate Members
5. Percentage of Member's Share of LLC Factors
6. Treatment of LLC's Nonbusiness Income
C. Treatment of Individual Nonresident Members
1. Source of Income
2. Investment LLCs
3. Composite Returns
4. Enforcement Mechanisms
5. Taxation of Resident Members
6. Taxation of Membership Interest Disposition
a. Corporate Partners
7. LLCs Classified As Associations and Taxable As Corporations
a. Formation
1560.04. UNRESOLVED LLC TAX ISSUES
Introductory Material
A. Passive Loss Requirements
B. Accounting Methods
1. Enterprise
2. Syndicate
3. Examples of Previous Private Letter Rulings
C. One Member LLCs
D. Tax Matters Partner
E. Conversions
F. At Risk Rules
G. Liquidation Payments
H. Anti–Abuse Rules
I. Use of LLCs In Estate Planning
J. "Series" LLCs
1560.05. SELF-EMPLOYMENT TAXES
1560.06. UNRELATED BUSINESS TAXABLE INCOME ("UBTI")
1560.07. COMPARISON OF LLC ACTS
A. Alabama - Ala. Code § 10-12-1, et seq.
1. Name
2. Nature of Business
3. Formation
4. Operating Agreement
5. Management
a. Standard of Care
b. Indemnification
c. Reliance on Information
6. Voting
7. Distribution in Kind
a. Distributions
b. Interim Distributions
c. Restrictions on Distributions
d. Right to Distribution
8. Liability to Third Parties
9. Contributions to Capital
a. Liability for Contributions
10. Profits and Losses
11. Withdrawal
12. Nature of Membership Interest
a. Assignment of Membership Interest
b. Right of Assignee to Become a Member
13. Judgment Creditors
14. Dissolution
a. Judicial Dissolution
b. Distribution of Assets
15. Derivative Action
16. Statute of Limitations
17. Foreign LLC's Name
18. Registration Requirement
19. Professional LLCs
20. Fees
21. State Tax Treatment
a. Federal Conformity
b. Filing Requirements
B. Alaska - Alaska Stat. § 10.50.00 et seq.
4. Management
5. Operating Agreement
7. Distributions
a. Interim Distributions
b. Distribution in Kind
c. Right to Distribution
d. Restrictions on Distributions
c. Statute of Limitations
16. Foreign LLC's Name
17. Registration Requirement
18. Professional LLCs
19. State Tax Treatment
C. Arizona - Ariz. Rev. Stat. Ann. § 29-601 et seq.
b. Distribution Upon a Member's Withdrawal
c. Distribution in Kind
e. Restrictions on Distributions
11. Nature of Membership Interest
12. Assignment of Membership Interest
a. Right of Assignee to Become a Member
21. Estate Planning
C1. Arkansas - Ark. Stat. Ann. § 4-32-101 et seq.
10. Liability for Contributions
11. Profits and Losses
12. Withdrawal
13. Nature of Membership Interest
14. Assignment of Membership Interest
15. Judgment Creditors
16. Dissolution
17. Distribution of Assets
18. Statute of Limitation
19. Derivative Action
20. Foreign LLC's Name
21. Registration Requirement
22. Professional LLCs
23. Statute of Limitations
24. Fees
25. State Tax Treatment
D. California - Cal. Corp. Code § 17000 et seq.
c. Right to Distributions
d. Restriction on Distributions
15. Distribution of Assets
17. Derivative Action
18. Foreign LLC's Name
19. Registration Requirement
20. Professional LLCs
21. Costs
22. State Tax Treatment
E. Colorado - Colo. Rev. Stat. § § 780-101 et seq.
8. Liabilities to Third Parties
10. Liability for Contribution
13. Nature of Membership
b. Rights of Assignee to Become a Member
14. Judgment Creditors
15. Dissolution
b. Administrative Dissolution
c. Distribution of Assets
20. State Tax Treatment
21. Fees
F. Connecticut - Conn. Corp. Act § § 93-267
6. Property Ownership
7. Voting
8. Distributions
9. Liabilities to Third Parties
10. Contributions to Capital
b. Right of Assignee to Become Member
17. Derivative Actions
19. Registration Requirements
22. Fees
G. Delaware - Del. Code Ann. tit. 18, § 101 et seq.
9. Liability to Third Parties
23. Taxation
G1. District of Columbia - D.C. Code Ann. § 29-1301 et seq.
15. Statute of Limitations
16. Derivative Action
18. Registration Requirements
H. Florida - Fla. Stat. § 608 et seq.
b. Distributions of Assets
b. Apportionment
I. Georgia - Ga. Code Ann. § 14-11-100 et seq.
b. Distributions in Kind
I1. Hawaii - Hawaii Uniform Limited Liability Company Act S 2723
d. Right to Distributions
15. Derivative Actions
19. Professional LLC's
J. Idaho - Idaho Code § 53-601 et seq.
a. Liability for Contribution
17. Foreign LLC's name
K. Illinois - Ill. Rev. Stat. chap. 805, ¶ 180-1-1 et seq.
9. Contributions to the Capital
16. Foreign LLC's name
18. Statute of Limitations
19. State Tax Classification
L. Indiana - Ind. Code § 23-18-1-1 et seq.
8. Liability to the Third Parties
9. Capital Contribution
19. Fees
L1. Iowa - Iowa Code Ann. § 490A.100 et seq.
7. Distribution
b. Restrictions on Distributions
M. Kansas - Kan. Stat. Ann. § 17-7662 et seq.
c. Rights to Distribution
21. Professional LLCs
N. Kentucky - Ky. Rev. Stat. Ann. § 275.001, et seq.
19. Conversions
O. Louisiana - La. Rev. Stat. Ann. § 12:1301 et seq.
16. Distribution of Assets
20. Registration Requirement
P. Maine - Me. Rev. Stat. Ann. tit. 31 § 601 et seq.
16. Derivative Actions
Q. Maryland - Md. Code Ann., Corp. and Assoc. § 4A-101 et seq.
c. Distributions in Kind
Q1. Massachusetts - Mass. Gen L. ch. 156C, § 1 et seq.
R. Michigan - Mich. Comp. Laws § 450.102 et seq.
d. Limitation on Distributions
16. Professional LLCs
S. Minnesota - Minn. Stat. § 322B.01 et seq.
a. Indemnification
b. Reliance on Information
b. Distributions In Kind
T. Mississippi - Miss. Code Ann. § 79-29-101 et seq.
b. Distribution In Kind
U. Missouri - Mo. Rev. Stat. § 351.015 et seq.
5. Standard of Care
6. Indemnification
7. Reliance on Information
8. Voting
9. Distributions
10. Liability to Third Parties
11. Contributions to Capital
12. Profits and Losses
13. Withdrawal
14. Nature of Membership Interest
17. Statute of Limitations
18. Derivative Action
19. Foreign LLC's Name
V. Montana - Mont. Code Ann. § 35-8-1 et seq.
V1. Nebraska - Neb. Rev. Stat. § 21-2601 et seq.
W. Nevada - Nev. Rev. Stat. § 86.010 et seq.
X. New Hampshire - N.H. Rev. Stat. § 304-C:1 et seq.
Y. New Jersey - N.J. Stat. Ann. § 42:2B-1 et seq.
10. Profits and Loss
Z. New Mexico - N.M. Stat. Ann. § 53-19 et seq.
8. Liabilities of Third Parties
AA. New York - N.Y. Ltd. Liab. Co. Law § 101 et seq.
a. Assignment of a Membership Interest
b. Rights of Assignee
BB. North Carolina - N.C. Gen. Stat. § 57C-1-01 et seq.
7. Distributions in Kind
a. Right to Distribution
CC. North Dakota - N.D. Cent. Code § 10-2-01 et seq.
a. Distribution of Assets
DD. Ohio - Ohio Rev. Code Ann. § 17-05-01 et seq.
EE. Oklahoma - Okla. Stat. tit. 18 ch. 32, § 2000 et seq.
17. State Tax Treatment
FF. Oregon - Or. Rev. Stat. § 63.001 et seq.
a. Expulsion
GG. Pennsylvania - Pa. Stat. § 8901 et seq.
c. Right of Assignee to Become a Member
HH. Rhode Island - R.I. Gen. Laws § 7-16-1 et seq.
HH1. South Carolina - S.C. Code Ann. § 3-44-1 et seq.
a. Distributions in Kind
II. South Dakota - S.D. Codified Laws Ann. § 47-34-1 et seq.
7. Restrictions on Distributions
17. Professional LLCs
JJ. Tennessee - Tenn. Code Ann. § 48-201-101 et seq.
KK. Texas - Tex. Corp. Code tit. 32, art. 1528n, et seq.
7. Right to Distribution
a. Distribution in Kind
b. Limitation on Distributions
c. Interim Distributions
19. Statute of Limitations
LL. Utah - Utah Code Ann. § 48-2c-101 et seq.
6. Distributions
b. Right to Distribution
7. Liability to Third Parties
8. Capital Contributions
9. Profits and Losses
10. Withdrawal
12. Judgment Creditors
13. Dissolution
14. Statute of Limitations
18. Fees
19. Taxation
LL1. Vermont - § § Vt. Stat. Ann. § § 11-3001 et seq.
MM. Virginia - Va. Code Ann. § 13.1-1000 et seq.
c. Judgment Creditors
NN. Washington - Wash. Rev. Code § 25.15 et seq.
a. Assignment of LLC Interest
OO. West Virginia - W. Va. Code § § 31B-1-101 et seq.
13. Assignment of Membership Interest
18. Conversion
20. Registration Requirements
23. State Tax Treatment
PP. Wisconsin - Wis. Stat. § § 183.01 et seq.
d. Statute of Limitations
15. Foreign LLC's Name
16. Registration Requirement
QQ. Wyoming - Wyo. Stat. § 17-15-01 et seq.
13. Judgment Creditor
Working Papers
Item Description Sheet
Worksheet 1 Treasury Regs. § § 301.7701-1 to -3 "Check-the-Box" Regulations
Worksheet 2 Table of IRS Rulings Classifying Foreign LLCs-Prior to"Check-the-Box" Regulations
Worksheet 3 [Reserved.]
Worksheet 4 [Reserved.]
Worksheet 5 States Permitting Single Member Limited Liability Companies
Worksheet 6 [Reserved]
Multistate Taxation of Transparent Entities: State Tax Implications of a New Federal Tax Concept
Worksheet 8 Disregarded Entities: A Disappearing Act for Sales Tax?
Bibliography