BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 2512 HEARING: 6/20/12
AUTHOR: Skinner FISCAL: Yes
VERSION: 4/10/12 TAX LEVY: No
CONSULTANT: Miller
INCOME TAXES: LIMITED LIABILITY COMPANY: PENALTIES
Imposes a $2,000 penalty on certain LLCs for failure to
file a tax return.
Background and Existing Law
Existing state law, SB 469 (Beverly, 1994), authorizes
formation of LLCs in California. An LLC is a business
entity formed by members by filing "Articles of
Organization," with an officer designated by state law. An
LLC combines aspects of partnerships and corporations, and
is generally considered less formal and more flexible than
a typical corporation, yet offers protection as well as
certain advantages that are much the same. For example,
its owners have limited liability for the entity's debts
and obligations, similar to the status of shareholders in a
corporation. Owner's assets are separate from the assets
of the LLC, so they cannot be seized in bankruptcy.
Members of the LLC may choose for the LLC to be taxed as a
regular corporation or as a partnership, where the income
and losses are normally passed through to the owners.
Flow-through taxation is advantageous since members are
only required to pay taxes on their earnings once, instead
of paying both entity level and personal income taxes on
appreciation of stock.
The LLC form and corporate benefits provide an incentive
for new businesses to choose LLC status, thereby
diminishing the state's corporate tax base without a
commensurate LLC entity-level tax. In recognition of the
expected revenue loss as LLCs replaced corporations as the
form of choice for business entities, SB 469 contained both
an annual tax (in an amount equal to the minimum franchise
tax and the limited partnership tax) and an annual fee
(based on total income received by the LLC). In addition
to the $800 annual tax, every LLC must pay a fee if the
AB 2512 -- 4/10/12 -- Page 2
total California annual income is equal to or greater than
$250,000. It was thought that the fee would ensure that
allowing LLCs to do business in California had a neutral
effect to the state's revenues. Currently, the LLC fees
vary from $900 for income ranging between $250,000 and
$499,999 to $11,790 for income of $5 million or more.
Existing state and federal law also authorize the creation
of other business entities such as "S" Corporations and
sub-chapter C Corporations. The law provides that all
corporations in this state must file the appropriate income
tax forms and pay the required tax, penalties and interest
association with the business and tax return type. Every
foreign and domestic LLC and corporation must file a
Statement of Information with the Secretary of state within
90 days after the filing of its original articles of
organization or application for registration (the documents
to establish incorporation), and biennially thereafter,
during the applicable filing period. Taxpayers that fail
to file these forms are subject to a penalty.
Existing law authorizes FTB to suspend a corporation's and
an LLC's powers, rights and privileges for non-payment of
fees due or non-filing of tax returns. The law also
provides that any corporation or any LLC that fails to file
a tax return after receiving a notice of demand to file may
be subject to a demand penalty. In addition, a foreign
corporation that fails to qualify to do business in
California, or any corporation whose powers, rights or
privileges have been forfeited or suspended, and which is
doing business in California, may also be subject to a
$2,000 penalty for failure to file a return (unless the
failure to file is due to reasonable cause). This penalty
only applies to corporations, including S corporations and
domestic corporations, but not LLCs.
Existing law allows the "demand" penalty to be imposed on
all taxpayers in an amount equal to 25% of the tax--
including LLCs-- for failure or refusal to furnish any
information requested in writing by the FTB or for failure
to make and file a return upon notice and demand by the
FTB, unless the failure is due to reasonable cause and not
willful neglect.
Proposed Law
AB 2512 -- 4/10/12 -- Page 3
Assembly Bill 2512 makes the existing $2,000 corporate
failure penalty apply to foreign and domestic LLCs unless
there is reasonable cause and not willful neglect. The
bill provides that the penalty shall be imposed if the
return is not filed within 60 days after FTB sends the LLC
a notice and demand to file the required return.
State Revenue Impact
According to the FTB, this bill will result in the
following revenue gains: $330,000 in 2011-12, $400,000 in
2012-13, $490,000 in 2013-14, $600,000 in 2014-15, and
$700,000 in 2015-16.
Comments
1. Purpose of the bill . This bill levels the playing
field between LLCs and other corporations by equalizing the
penalty structure. According to the author: "when the
legislature approved the Beverly-Killea Limited Liability
Company Act in 1994, a code section regarding the penalty
for failure to file while suspended, forfeited, or not
qualified to do business within the State was not amended
to include LLCs. As a result, in some situations, the
Franchise Tax Board (FTB) does not have the authority to
treat LLCs in the same manner as corporations. To be
qualified to do business within the state, a corporation or
LLC must first register with the Secretary of State (SOS).
When a corporation or LLC fails to pay taxes, penalties, or
interest, or fails to provide a required tax return, the
FTB may submit the corporation or LLC to the SOS for
suspension or forfeiture of the corporation's or LLC's
powers, rights and privileges. When a corporation is
suspended, forfeited, or is unqualified to do business, the
FTB has discretionary authority to penalize the corporation
if the entity fails to file a return after the FTB issues a
formal demand. The FTB does not have the same authority for
LLCs. Corporations can be charged a $2000 penalty, while
LLCs do not face any penalty for committing the same
infraction. There were an estimated 1,011 LLCs that failed
AB 2512 -- 4/10/12 -- Page 4
to file a tax return in 2010."
2. Another penalty : This bill imposes a penalty on LLCs
that was previously only intended for corporations. Since
the FTB may already impose the "demand" penalty on LLCs, is
one more penalty one too many?
Assembly Actions
Assembly Revenue and Taxation: 6-2
Assembly Appropriations: 12-5
Assembly Floor: 48-27
Support and Opposition (6/13/12)
Support : Franchise Tax Board (FTB); California
Professional Firefighters; California Tax Reform
Association; AFSCME; California Federation of Teachers;
California School Employees Association.
.
Opposition : Unknown.