Should your California LLC be owned by a Wyoming LLC?
Many of my clients that call about asset protection ask if they should have a Wyoming LLC own a California LLC. I have repeatedly explained to clients that there is no benefit to having a Wyoming LLC own a California LLC compared to a Wyoming LLC simply owning property in California. However, after hearing this idea for the 100th time, I decided to do my own google search to find out where this idea was coming from.
It turns out there are several companies (typically not actual law firms) that promote a Wyoming LLC owning a California LLC over a Wyoming LLC owning California property directly. What is their argument? They argue that if the Wyoming LLC owns California property it must register to do business in California. Ok, I agree so far. However, they also argue that if a Wyoming LLC does not own the California real estate, and instead the Wyoming LLC owns a membership interest in the California LLC then the Wyoming LLC does not have to register to do business in California. This is where I, and more importantly, the California Franchise Tax Board, disagree.
The California Franchise Tax Board states that:
“An LLC is “doing business” if any of the LLC’s members, managers, or other agents performs activities in California on behalf of the LLC, regardless of where the LLC otherwise conducts business. In addition, an LLC is “doing business” in California under R&TC Section 23101(a) if: It is a nonregistered foreign LLC [e.g. a Wyoming LLC] that is a member of an LLC that does business in California [e.g. your California LLC].”
It does not get much clearer than that! Whether you believe the Franchise Tax Board should be able to do this or not is for a different article, but its position is clear. Your Wyoming LLC that owns a membership interest in a California LLC must register to do business in California. The Franchise Tax Board provides the following example to further clarify the rule:
“Paul is a California resident and a member of a Nevada LLC. The Nevada LLC owns property in Nevada. The LLC hires a Nevada management company to collect rents and provide maintenance.”
Notice here that the FTB is creating an example of an LLC that has very little contact with California. The FTB goes on to provide:
“Paul has the right to hire and fire the management company. He occasionally has telephone discussions from California with the management company in Nevada regarding the property. “
In this example, the LLC’s only connection to California is that it has a California resident as a Manager or Managing Member. Based upon these assumptions, the FTB confirms that:
Paul is ultimately responsible for the property and oversees the management company. Paul conducts business in California on behalf of the LLC. The LLC must file Form 568.
You can find more examples on this issue on the FTB’s website here.
Therefore, if you have a Wyoming LLC with any of its California members or managers making decisions, it must register to do business in California. Failure to register in California subjects you to financial penalties and eliminates the liability protection you are attempting to create.
If the Wyoming LLC, owning a membership interest in a California LLC, has to register to do business in California, then how is that better than having a Wyoming LLC own California property directly? It isn’t. Instead, it only complicates the asset protection structure.
We have been providing estate planning and asset protection advice to California residents since 2007. Our firm creates plans for California residents that are aligned with California law and the policies of the Franchise Tax Board. As discussed in our other articles, there is no perfect solution to liability protection. We are happy to discuss and design a plan with you that will work in California.
John Wong advises on all aspects of estate planning, probate, asset protection and trust administration. He believes that estate planning is about planning for life; while having protections in place should the unexpected occur.
