State tax implications uncertain for corporate LLC members.

• Author: Boucher, Karen J.
• Position: Limited liability company

Few, if any, states have specifically addressed the tax treatment of corporate members of limited liability companies (LLCs). If an LLC is treated as a partnership for state tax purposes, it could be argued that corporate LLC members should be treated in the same manner as corporate partners. Nonetheless, many states vary the treatment of a corporate partner, depending on whether the corporation is a limited or general partner. As all members of an LLC have limited liability, it might be argued that all LLC members should be taxed in the same manner as limited partners. However, it is possible that the states may determine that members participating in managing the LLC should be treated as general partners and other members as limited partners.

The primary state issues that should be addressed before a corporation (especially one conducting business in several states) acquires an interest in an LLC include taxability of the LLC, nexus for the corporate member, inclusion in tax base, composition of apportionment factors and availability of tax credits.

Taxability of the LLC

Although the majority of states do not impose an entity-level income tax on an LLC that is treated as a partnership for Federal tax purposes, some states (like Florida and Texas) tax an LLC as though it were a corporation. If the corporate member is in a state that treats the LLC as a passthrough entity, while the LLC operates in a state that imposes an entity-level tax on the LLC, double taxation may occur.

Example: TX, a Virginia LLC properly classified as a partnership, is formed to operate a manufacturing facility in Texas. Two Virginia corporations, Va1 and VA2, are equal members in TX. Tx's activities are limited to Texas; Va1 and VA2 conduct business only in Virginia. Because Texas imposes an entity-level tax on LLCs, TX will be subject to Texas tax on all of its income. Tx's income will pass through and be included in Va1 and Va2's Federal income and also will be included in their Virginia tax base (Federal taxable income is the starting point in computing the Virginia tax base). Unless Virginia provides relief through the apportionment provisions, Va1 and VA2 also will be subject to Virginia tax on all of Tx's income.

Nexus

Does the mere holding of an interest in an LLC create nexus for a corporate member? In other words, if a corporate member's only connection with a state is the ownership of an interest in an LLC doing business in the state, is the corporation...