BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 1143
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          Date of Hearing:   May 1, 2013

                        ASSEMBLY COMMITTEE ON APPROPRIATIONS
                                  Mike Gatto, Chair

                   AB 1143 (Skinner) - As Amended:  April 22, 2013 

          Policy Committee:                              Revenue and  
          Taxation     Vote:                            8-0

          Urgency:     Yes                  State Mandated Local Program:  
          No     Reimbursable:              

           SUMMARY  

          This bill makes foreign nonqualified limited liability companies  
          (LLCs) subject to contract voidability provisions of existing  
          law, meaning the LLC can lose its ability to enforce contracts  
          it has entered into, if the LLC has failed to file a required  
          tax return with the Franchise Tax Board (FTB) or pay the amount  
          of state tax due.  

           FISCAL EFFECT  

          The FTB staff estimates this bill will result in revenue gains  
          of approximately $50,000 annually, declining after several years  
          as compliance with the law increases.  The impact on FTB's  
          administrative costs would be neglible.

           COMMENTS  

           1)Purpose.   The author states when domestic and foreign  
            qualified (registered with the state) LLCs do not file  
            required tax returns or do not pay taxes, penalties, fees or  
            interest,  they are subject to contract voidability.  When an  
            entity is subject to contract voidability, any contract  
            entered into may be voided by another party to the contract, a  
            significant penalty for any business.  The author notes while  
            domestic and foreign qualified LLCs are subject to this  
            penalty, foreign nonqualified LLCs were inadvertently omitted.  
             
             
             The author explains AB 1143 closes a loophole for foreign LLCs  
            not registered with the state, thereby subjecting them to the  
            same contract voidability laws as other LLCs and all  








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            corporations.  The author contends making this change will  
            provide an additional incentive for foreign nonqualified LLCs  
            to register with the Secretary of State and to stay current  
            with their state tax obligations, as well as provide greater  
            protections to California consumers.

           2)Support  .  The bill's sponsor, the FTB, argues AB 1143 would  
            provide equitable tax treatment between foreign nonqualified  
            LLCs and all other LLCs.  Supporters, including the California  
            Tax Reform Association and SEIU California, state that it is  
            important to ensure that LLCs are registered and paying their  
            appropriate taxes to California. The proponents state AB 1143  
            is needed to close any potential loophole that loses tax  
            revenue and advantages out-of-state companies.

           3)LLC Background.   An LLC is a business entity formed when  
            members file articles of organization with the state.  An LLC  
            combines aspects of partnerships and corporations.  LLCs are  
            less formal and more flexible than a typical corporation, yet  
            offer many of the benefits of a corporation; in particular LLC  
            owners have limited liability for the LLCs debts and  
            obligations.

            A foreign nonqualified LLC, an LLC that is not registered with  
            the California Secretary of State (SOS), is the only type of  
            business entity excluded from the contract voidability  
            provisions of existing law.  When LLCs were authorized to form  
            in California, LLCs were specifically included in the  
            definition of taxpayer and the FTB was authorized to submit  
            LLCs for suspension to the SOS for non-payment of taxes or for  
            failure to file required tax returns, one consequence of which  
            is being subject to voidability of corporate contracts.   
            However, the definition of taxpayer only refers to an LLC,  
            foreign or domestic, that is organized in California or  
            registered with the SOS.  An LLC that is neither organized nor  
            registered in California with the SOS (i.e. a nonqualified  
            foreign LLC) is not subject to contract voidability.

           4)There is no registered opposition to this bill.  



           Analysis Prepared by  :    Roger Dunstan / APPR. / (916) 319-2081 










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