BILL ANALYSIS Ó AB 1143 Page 1 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 Page 2 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 Page 3