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
AB 1143
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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
AB 1143
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