Posted by Nate
Posted on 05-13-2008 under Business Operations

If your business is a registered LLC in California or registered to do business in California, then you know full well how annoying those nasty LLC fees are. Not only do you have the annual tax of $800, but you also are forced to pay another LLC annual fee, which is based on the total gross income and cost of goods sold from your business. This fee is calculated based on income earned both inside and outside of California.

The LLC annual gross income fee breakdown is as follows:

Total Income between 250k – 500k: $900
Total Income between 500k – 1M: $2500
Total Income between 1M – 5M: $6000
Total Income over 5M: $11,790

There have been two separate court rulings in California that now state that these LLC fees are unconstitutional. The first case of Northwest Energetic Services LLC, v California Franchise Tax Board, the California Superior Court found that the annual fee based on worldwide gross income violated the fair appointment requirements of the US Constitution. Northwest, like many companies, were paying for California LLC fees when they had no business activity in California for several years.

The second case of Ventas Finance LLC, v. California Franchise Tax Board, the Superior Court again ruled that the annual LLC fee was unconstitutional on the grounds the worldwide grosses of Ventas were not proportionally taxed based on their in-state business income. Ventas contributed less than 10% of its business activity in California, but was taxed for their entire annual gross.

This is obviously unfair to businesses, and many tax attorneys are saying that the LLC fee will soon be deemed unconstitutional regardless of whether the LLC conducts all of their business activities in California or not. This is good news for business like ours, and many others like us, who do conduct all or a far amount of business in the Golden State. But unfortunately, until the appellate court reviews these courts rulings we still have to fork over the ridiculous annual sums to the FTB or face heavy fines. This kind of thing brings into question the usefulness of having an LLC in the first place.

All businesses registered as an LLC in California should file a protective claim pending the final outcome of the LLC fee litigation. At the very least, these unnecessary fees could be done away with soon and quite possibly be recuperated by business via a refund. Fingers crossed everybody.

Source: California Tax Attorney Blog