BILL ANALYSIS                                                                                                                                                                                                    




                   Senate Appropriations Committee Fiscal Summary
                           Senator Christine Kehoe, Chair

                                           1244 (Walters)
          
          Hearing Date:  5/10/2010        Amended: 5/4/2010
          Consultant:  Bob Franzoia       Policy Vote: L&IR 6-0
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          BILL SUMMARY: SB 1244 would do the following:
          - Include within the definition of employee for the purposes of  
          employment taxes, any member of a limited liability company  
          (LLC) that is treated as a corporation for federal tax purposes.
          - Specify that the definition of employee does not include any  
          member of a LLC that is treated as a partnership for federal  
          income tax purposes.
          - Provide that wages include compensation paid to a member of a  
          LLC who files a federal income tax return.
          By expanding the base of wages subject to unemployment insurance  
          taxes, this bill would deposit additional moneys into the  
          Unemployment Fund, a continuously appropriated fund, thereby  
          making an appropriation.
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                            Fiscal Impact (in thousands)

           Major Provisions         2010-11      2011-12       2012-13     Fund
           Unemployment Insurance Negligible increase in revenue  
          annuallySpecial*
          Code clarification

          * Unemployment Fund
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          STAFF COMMENTS: A LLC can elect how it is to be taxed by the  
          Internal Revenue Service (IRS) depending on the ownership  
          structure in place.  One of these possible elections is as a  
          corporation.  With both corporations and LLCs, the IRS requires  
          that a reasonable compensation be paid to all shareholders.

          The IRS and the Franchise Tax Board (FTB) treat LLCs as a sole  
          proprietorship, partnership, or corporation depending on the  
          circumstances.  The Unemployment Insurance Code requires the  
          Employment Development Department (EDD) to treat the LLC as a  
          unique entity type, instead of using the IRS/FTB methodology.   










          Because EDD is unable to treat LLCs as a corporation, LLCs are  
          not employers in the traditional sense, they do not have  
          employees and they do not pay unemployment insurance taxes.  The  
          purpose of this bill is to conform the Unemployment Insurance  
          Code to federal regulations on LLCs so they may offset federal  
          unemployment insurance tax costs.

          Generally, this bill will result in a minor increase in the  
          number of persons subject to employer taxes paid into the  
          Unemployment Fund.  It would have no impact on any employees of  
          LLCs, only LLC members who are managing and non managing  
          members.