Posted by John Merchant on June 19, 2006 at 14:56:52:
This is absolutely right, and like WA State, it’s tax evasion (illegal) to try to play any games regarding sales or excise taxes on RE conveyances.
In fact our Atty. General’s office has several Asst. AGs who spend most of their time researching and prosecuting attempts here to circumvent excise tax…which the unwary or scheming have attempted to circumvent occasionally by grant or quit claim deed into an LLC, then internal sale of the LLC to a new buyer. A real NO NO NO.
It’d be intereting to run the Title Co requirements when sellin or conveying to an LLC to see what they might require about CA registration of foreign LLC.
an out-of-state LLC must register to do business in the State of California, and is subject to the Cal franchise tax. The minimum annual tax, the last time I checked, was $800.
You can operate under the radar screen for a while, until you get caught. An unregistered LLC cannot give good title to a buyer. Title company will not issue a policy. and if you acquire a property in the name of an unregistered LLC, you have created a public record of your business activities. The FTB has access to these records, although I am not sure how aggressively they pursue this source of info.
Posted by John Merchant on June 17, 2006 at 17:00:35:
Not every RE owner who’s owning as out of state LLC need register in other states, but if he’s “doing business”, such as rental business, then yes he would have to.
General law in US is mere buying, owning and selling of RE is NOT doing business so not required to register with the other states Sec of State’s Corp Registery.
i.e. you could buy, own, fix & resell a house in any other state and it would not normally require you to register because all states have ruled that is not “doing business”.
And if you’re hazy on whether a registration of your out of state LLC is required in CA, I’d make a call to Sacramento and talk to somebody there in Sec of State’s Corp division to get their opinion…that’s free plus you’re getting info from the enforcers and that’s invaluable!
You should be aware that California requires the buyer (but generally done by escrow) to withhold 3 1/3% of the sales price and transmit it to the CA Franchise Tax Board as a prepayment deposit on California state income taxes. So if your LLC has managed to avoid registering and paying state income taxes, you would still leave some $$$ in CA upon close of escrow.
I suspect that an unregistered LLC would also have to prove to the title officer that the LLC was registered in California before a title report would be written…and without a title report, it is most unlikely that a buyer would close escrow.
There are some intersting rules regarding the type of LLC and the 3 1/3% deposit. However, I doubt whether there are any which allow an unregistered foreign LLC to escape paying the piper.
The original post inquired about the tax consequences of “doing business” in California. He did not inquire about what constitutes doing business.
I haven’t had to look at this in a while, so I am not sure when an investor’s activities cross the line. Ownership of real estate, in itself, may not cross the line. [not sure about this, by the way. California is very aggressive in its rules]. But it presents a problem with title. But if that property is held for rental, you have crossed the line.