BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                    AB 2544


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          Date of Hearing:  May 18, 2016


                        ASSEMBLY COMMITTEE ON APPROPRIATIONS


                               Lorena Gonzalez, Chair


          AB  
          2544 (Travis Allen) - As Amended May 12, 2016


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          Urgency:  No  State Mandated Local Program:  NoReimbursable:  No


          SUMMARY:


          This bill creates the Access to Angel Investors Act and provides  
          certain limited liability companies (LLCs) an exemption from the  
          annual LLC tax, equal to the minimum franchise tax (MFT), and  
          the associated annual fees. For taxable years beginning before  








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          January 1, 2020, an LLC is exempt from these taxes and fees if  
          they are a qualified investment partnership (QIP), which is an  
          LLC that meets the following requirements:  


          1)It is classified as a partnership for California income tax  
            purposes. 


          2)No less than 90% of the costs of its total assets consist of  
            qualifying investment securities, deposits at banks or other  
            financial institutions, interest or investments in a  
            partnership, or office space and equipment reasonably  
            necessary to carry on its activities as a QIP.


          3)No less than 90% of its gross income consists of interest,  
            dividends, and gains from the sale or exchange of qualified  
            investment securities or investments in a partnership.


          FISCAL EFFECT:


          Annual GF revenue loss of $1.7 million, $1.8 million, and $1.9  
          million in FY 2016-17, FY 2017-18, and FY 2018-19, respectively.  



          COMMENTS:


          1)Background on minimum franchise tax and fees. Existing law  
            imposes a franchise tax on all corporations doing business in  
            California equal to 8.84% of its taxable income. The minimum  
            franchise tax (MFT) is $800, no matter what the taxable income  
            is. Existing law also requires a limited partnership (LP), a  
            limited liability partnership (LLP), or a LLC to pay an annual  
            tax equal to the MFT for the privilege of doing business in  








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            California. These entities (known as "pass-through entities")  
            are not subject to any tax based on taxable income because the  
            income is passed through to the owners. 
            The MFT was enacted to ensure that all corporations, LPs,  
            LLPs, and LLCs pay at least a minimum amount of tax for the  
            privilege of conducting business in California, regardless of  
            the business's income or losses. Thus, the tax is not an  
            income tax but rather it is a tax on the right to exercise the  
            powers granted to a corporation conducting business in  
            California. Even when a business earns no income, it still  
            receives the benefits of its corporate status, including the  
            limited liability protection under this state. 


            LLCs also pay an annual fee based on the total income. This  
            fee ranges from $900 for an LLC with a total income between  
            $250,000 and $499,999 to $11,790 for an LLC with a total  
            income in excess of $5 million. 


          2)Purpose. This bill aims to incentivize the creation of QIPs in  
            California. According to the author, an effective way for a  
            startup to accept capital from smaller accredited investors is  
            to pool the investors into a QIP that invests only in that  
            startup. The QIP makes the startup more attractive to  
            investors who can now defer to the partnership manager on  
            major decisions rather than constantly getting involved in the  
            business of a startup. According to the author, a QIP is not a  
            traditional businesses, and the MFT prevents them from  
            forming. 
          Analysis Prepared by:Luke Reidenbach / APPR. / (916)  
          319-2081















                                                                    AB 2544


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