An Update on the State Tax Treatment of LLCs and LLPs
State Tax Notes
Many factors should be considered when deciding how to structure a multistate business entity, and state taxation cannot be overlooked. The charts that follow can assist when evaluating whether to form a limited liability company or a limited liability partnership.
Over the years, LLCs — and to a lesser extent, LLPs — have become popular choices for structuring or restructuring multistate business entities. The charts present the various ways the 50 states and the District of Columbia treat LLCs and LLPs. They include state tax considerations such as entity-level taxes, conformity with the federal income tax classification rules, and potential entity-level withholding or composite return requirements. The footnotes to the charts also include useful information, such as listing the growing number of states that exempt qualified investment partnerships (QIPs) or their nonresident partners from state income tax and withholding.
In light of the growing popularity of series LLCs, the last column in the chart highlights which states have enacted series LLC statutes and which state tax authorities have issued guidance on how those entities are to be taxed.
In September 2010 Treasury issued proposed regulations explaining how a series LLC would be treated for federal income tax purposes.1 Although Treasury has yet to do so, we expect most states will enact legislation authorizing the formation or qualification of series LLCs once Treasury finalizes the proposed regulations. We also expect that many more states will publish guidance on how each series and the parent LLCs are to be treated for state tax purposes.2
The second chart lists the states that impose a corporate franchise tax based on net worth or debt as of November 1. It also lists those states that subject LLCs, LLPs, and limited partnerships
(LPs) to that tax, as well as those states that exempt them.
Republished with permission. The complete article originally appeared in State Tax Notes on January 8, 2018.
