Courtesy of CEB, we are bringing you selected legal developments in areas of California business law that are covered by CEB’s publications. This month’s feature is from the December 2021 update to Forming and Operating California Limited Liability Companies. References are to the book’s section numbers. The most significant legal developments since the last update include developments in such important topic areas as franchise taxes, the new federal Corporate Transparency Act, the California SALT tax workaround, and recent amendments to Securities Act regulations.
December 2021 Update
In general, an LLC must pay a franchise tax of $800 per year for the privilege of being an LLC, regardless of gross receipts or net income. Rev & T C §17941(a). This amount is equal to the minimum tax imposed on corporations, including S corporations (Rev & T C §23153(a)), on limited partnerships (Rev & T C §17935(a)), and on limited liability partnerships (Rev & T C §17948(a)). There is an exception for LLCs organized or registered with the Secretary of State on or after January 1, 2021, and before January 1, 2024. Such LLCs are not subject to the $800 annual minimum franchise tax for their first taxable year. Rev & T C §17941(g). See §§1.19, 3.6, 3.13, 3.57, 5.4.
In Vazquez v Jan-Pro Franchising Int’l (2021) 10 C5th 944, the California Supreme Court declared that its decision in Dynamex Operations W., Inc. v Superior Court (2018) 4 C5th 903 was retroactive. See §§3.63, 13.40A.
The new federal Corporate Transparency Act (CTA) (Pub L 116–283, 134 Stat 4604), which became law as of January 1, 2021, and is codified in its entirety at 31 USC §5336, essentially eliminates the possibility of complete anonymity for the beneficial owners of many corporations, LLCs, and “other similar” entities. The CTA is intended to better enable law enforcement to combat money laundering, terrorism financing, tax and securities fraud, and other crimes by imposing new federal reporting requirements applicable to many domestic as well as foreign business entities. There are significant civil and criminal penalties for false reporting and failure to report, including a civil penalty of not more than $500 per day that the violation continues, and a fine of not more than $10,000, imprisonment for up to 2 years, or both. See 31 USC §5336(h). The CTA will become effective when implementing regulations are promulgated by the Secretary of the Treasury (not later than January 1, 2022). 31 USC §5336(b)(5). See chap 7A for a summary of the new law and its reporting requirements. See also §3.90.
If a nonresident member of an LLC meets the quantitative test in Rev & T C §23101(b), it will be deemed to be doing business in California. See In re Aroya Invs. I, LLC (California Office of Tax Appeals, July 7, 2020, OTA Case No. 19074982), available here (holding that out-of-state LLC was doing business in California, and therefore subject to franchise tax, based solely on its ownership of 0.78 percent membership interest (worth $481,000) in another manager-managed LLC). See §§5.4B, 14.7B.
A growing list of states are offering pass-through business owners a workaround for the $10,000 federal deduction limit on state and local taxes (known as the SALT cap; see IRC §164(b)(6)). California has joined the ranks of states who have developed a way to circumvent this limitation with the enactment of AB 150 (Stats 2021, ch 82). Effective for tax years 2021–2025 and codified in Part 10.4 of the Revenue and Taxation Code (called the Small Business Relief Act (Rev & T C §§19900–19906)), its provisions allow pass-through entities—including partnerships, limited partnerships, LLCs, and S corporations—to get around the $10,000 limitation on SALT by permitting them to pay a state tax on their income at a 9.3 percent rate. See Rev & T C §19900. That tax is then taken as a deduction on an entity’s federal income tax return and treated as a credit on the California state income tax return of the equity owners of the entity. See Rev & T C §17052.10. See §5.6B.
In Butler Am., LLC v Aviation Assur. Co., LLC (2020) 55 CA5th 136, the court of appeal affirmed the trial court’s finding that the principal of an LLC judgment debtor and the entities that the principal controlled were all alter egos of the debtor. The principal owned and controlled all the entities and did not observe the formalities required for keeping the entities separate. Most importantly, the debtor was nothing but a shell, with no substantial business activity and no income with which to pay its debts. Its only function was to act as a screen for the principal and the entities to hide behind to avoid paying the judgment creditor. See §§6.26–6.29.
SEC Rule 504 was amended in 2021 to increase the maximum offering amount from $5 million to $10 million. SEC Release No. 33–10884 (Jan. 14, 2021), effective Mar. 15, 2021. See §§12.25–12.26.
SEC Regulation Crowdfunding was amended in 2021 by SEC Release No. 33–10884. Among other things, the amendment eliminated the dollar limit on the aggregate amount of all crowdfunded offerings that could be sold to a single investor during a 12-month period, and raised the total amount that a company can raise in a 12-month period to $5 million. See §12.34A.
SEC Regulation A+ was revised by SEC Release No. 33–10884 to raise the limit on securities offerings under Tier 2 to up to $75 million in a 12-month period, with not more than $22,500,000 in offers by selling security holders that are affiliates of the issuer. See §12.34B.