The owners of multistate businesses must consider a multitude of factors when deciding how to structure their business ventures, and state taxation cannot be overlooked.
The accompanying charts can assist in that evaluation for limited liability companies (LLCs) and limited liability partnerships (LLPs).
In recent years, LLCs and, to a lesser extent, limited partnerships and LLPs, have become the popular choice for structuring or re-structuring multistate business entities. According to recent Internal Revenue Service statistics, more than two-thirds of all Subchapter K entities are now domestic (U.S.) LLCs, surpassing all other entity types for 15 consecutive years.
The accompanying charts summarize the various differences in the tax treatment of LLCs and LLPs across the 50 states and the District of Columbia. The charts discuss state tax considerations, such as conformity with the federal income tax classification rules, entity-level taxes, and potential entity-level withholding or composite return requirements. In addition, we hope that the endnotes will also be useful, especially those listing the states that exempt qualified investment partnerships (QIPs) or their nonresident partners from state income tax and nonresident partner withholding.
Series LLCs—a Once Hot Idea That Seems to Have Cooled?
Like LLCs, the use of series LLCs to structure a multistate business has grown in popularity in the past 10 years or so. The last column of the first chart highlights which states have enacted series LLCs statutes and which state taxing authorities have issued guidance on how these odd creatures are to be taxed by that state. It reflects helpful input from the AICPA’s State Tax Resource Panel and from many state revenue authorities, for which we are thankful.
In September 2010—nearly a decade ago—the U.S. Treasury Department issued proposed regulations explaining how a series LLC would be treated for federal income tax purposes. See Prop. Treas. Reg. § §301.6011-6, 301.6071-2, and 301.7701-1(a)(5), and amending § § 301.7701-1(e) and (f). For a more thorough analysis of the proposed series LLC regulations and the accompanying state tax implications, see M. McLoughlin and B. Ely, “IRS Issues Long-Awaited Guidance on Series LLCs; Will the States Soon Follow?” 20 JMT 8 (January 2011).
We hope that Treasury will issue final series regulations by this Fall, al-though this project has been downgraded several times, most recently by the need for numerous regulations under the Tax Cuts and Jobs Act of 2017 (TCJA) and now the CARES Act of 2020. Once finalized, we anticipate that a number of states will enact legislation authorizing the formation or qualification of series LLCs and that a large number of states will publish some form of guidance on how each series and the “mother ship” LLC itself are to be taxed for a variety of state taxes, including unemployment compensation taxes or premiums. Our chart lists the handful of states that have grown impatient and enacted series LLC legislation despite the lack of official guidance. Indeed, there are series LLC bills pending in several state legislatures as of this writing.