The Franchise Tax Board (“FTB”) recently issued a ruling finding that a sole owner of a disregarded entity (i.e., a qualified Subchapter S corporation or single member limited liability company) was “doing business” in California even though the owner has no activities in California other than those of its disregarded entity. Wait – but what about California Corporations code section 191(b)(2) and (6) that provides that a foreign corporation will not be considered to be transacting intrastate business merely because of its status as either a shareholder of a foreign corporation transacting intrastate business or a member or manager of a foreign limited liability company transacting intrastate business? According to the FTB, the activities of the disregarded entity will be considered activities of its owner and, consequently, if the activities of the disregarded entity constitute “doing business” in California, the owner is also doing business in California. This means that the owner is required to file a tax return in California, and pay the annual franchise tax. An owner that fails to do so will be assessed tax, penalties and interest.
We will have to wait and see if the FTB’s ruling will successfully be challenged.