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Cancellation, with SOS that includes a statement

method used to calculate loss carryovers,

income to total income. The ratio for the prior

that all of the items above have been completed

deferred deductions, and deferred income for

year will generally be accepted as reasonable in

before the SOS will cancel the LLC.

nonresident and part-year resident taxpayers.

determining the California part of the distribution

For more information on how to cancel your LLC,

This new law changed the tax computation to

subject to withholding. LLCs are required to

contact:

recognize those items, and established a new

withhold tax at a rate of 7% of distributions

method to determine percentages for computing

(including property) of income from California

By Mail:

LIMITED LIABILITY COMPANIES

tax for all nonresidents and part-year residents.

sources made to domestic nonresident members.

CALIFORNIA SECRETARY OF STATE

The nonresident tax forms (Long and Short

For more information, get Schedule R.

PO BOX 944228

Form 540NR) have been revised to more clearly

SACRAMENTO CA 94244-2280

The FTB has administrative authority to allow

show that nonresidents pay tax to California only

reduced withholding rates, including waivers,

In Person: CALIFORNIA SECRETARY OF STATE

on their California taxable income. For more

when requested in writing. These authorizations

1500 11TH STREET SUITE 345

information, get FTB Pub. 1100, Taxation of

may be one-time, annual, or for a longer period.

SACRAMENTO CA 95814

Nonresidents and Individuals Who Change

Waivers or reduced withholding rates will

Phone Number: (916) 653-3795

Residency.

normally be approved when distributions are

Office hours are Monday through Friday, 8 a.m. to

CAUTION – The requirements and procedures

made by publicly-traded partnerships and on

5 p.m.

discussed above are not related to the nonresi-

distributions to brokerage firms, tax-exempt

dent withholding requirements discussed under

organizations, and tiered LLCs.

Website:

General Information R, Withholding

No withholding of tax is required if the distribu-

Email address: Partnership@ss.ca.gov

Requirements.

tion is a return of capital or does not represent

If the LLC is being cancelled to be converted to

taxable income for the current or prior years.

Q Cancelling a Limited

another type of business entity, be sure to file the

Although a waiver is not required in this situation,

appropriate forms with the SOS.

Liability Company

if upon examination the FTB determines that tax

R Withholding Requirements

withholding was required on a distribution, the

LLCs are required to pay the $800 annual tax and

LLC may be liable for the amount that should

file a California return until the appropriate papers

Foreign (non U.S.) Nonresident Members

have been withheld and penalties.

are filed. In order to cancel an LLC, the following

As described in IRC Section 1446 and modified

steps must be taken:

Send waiver requests and inquiries to:

by R&TC Section 18666, if an LLC has any

1. File a

Form

LLC-4/7, Certificate of Cancella-

income or gain from a trade or business within

WITHHOLDING SERVICES AND COMPLIANCE

tion, with the SOS. The SOS also requires a

California, and if any portion of that income or

SECTION

domestic LLC to file a

Form

LLC-3, Certificate

gain is allocable under IRC Section 704 to a

FRANCHISE TAX BOARD

of Dissolution. Please contact the SOS for

foreign (non U.S.) nonresident member, the LLC

PO BOX 92867

more details;

is required to withhold tax on the allocable

SACRAMENTO CA 94267-0651

2 File form FTB 3555L, Request for Tax

amount.

Telephone:

(888) 792-4900 (U.S. toll-free)

Clearance Certificate Limited Liability

State and Federal Differences Regarding

(916) 845-4900

Company or Limited Liability Partnership, with

Foreign (non U.S.) Nonresident Members

The tax withholding should be reported on and

the SOS;

California generally conforms to IRC Section 1446

paid with Form 592, Form 592-A, and/or

3. Pay the $800 annual tax to the FTB (using

and corresponding federal rulings and proce-

Form 592-B.

form FTB 3522); and

dures. The main differences between California

4. File a final California LLC return (Form 568)

The taxable income of nonresident members is

and federal laws in this area are:

the distributive share of California sourced LLC

with the FTB.

a. The California withholding rate is 8.84% for C

income, not the distributed amount. For more

Note: The Form LLC-4/7's effective date will stop

corporations and 9.3% for individuals,

information, get FTB Pub. 1017, Nonresident

the assessment of the $800 annual tax for future

partnerships, LLCs, and fiduciaries.

Withholding Partnership Guidelines.

tax years. If Form LLC-4/7 is filed after the tax

b. Income attributable to the disposition of

year ending date, a subsequent year return and an

Note: The nonresident withholding requirements

California real property is subject to withhold-

additional $800 tax will be required.

and procedures discussed above are not related

ing under R&TC Section 18666.

to the nonconsenting nonresident members' tax

Short Form Cancellation

Domestic (U.S.) Nonresident Members

paid by an LLC on behalf of nonresident members

Beginning January 1, 2005, LLCs organized in

An LLC is required to withhold funds for income or

as discussed under General Information P,

California on or after January 1, 2004, do not

franchise taxes when it makes a distribution of

Nonresident Members.

need to obtain a tax clearance certificate prior to

income to a domestic (U.S.) nonresident member

the SOS filing of the certificate of cancellation if

(R&TC Section 18662). This includes prior year

S Check-the-Box Regulations

all of the following apply:

income that should have been, but was not

California generally conforms to the federal entity

previously reported as income from California

• The certificate of cancellation is being filed

classification regulations (commonly known as

sources on the member’s California income tax

within 12 months of the filing of the articles of

“check-the-box” regulations). These regulations

return. However, withholding is not required if

organization.

allow certain unincorporated entities to choose

distributions of income from California sources to

• The LLC has no debts or liabilities, except

tax treatment as a partnership, a corporation, or a

the member are $1,500 or less during the calendar

those described as tax liabilities.

single member LLC (SMLLC) (SB 1234; Stats.

year or if the FTB directs the payer not to withhold.

• The 'tax liability' of the canceling LLC will

1997, Ch. 608).

either be paid or be assumed by another

Domestic (U.S.) nonresident members include

Generally, any elections made for federal

business entity or individual.

individuals who are nonresidents of California and

purposes under the federal “ check-the-box ”

• A final tax return has been filed with FTB.

corporations that are not qualified to do business

regulations are treated as California elections. No

• The LLC has not conducted any business

in California or do not have a permanent place of

separate elections are allowed. If federal

since organizing.

business in California. Domestic nonresident

Form 8832, Entity Classification Election, is filed

• All assets of the LLC have been distributed to

members also include nonresident estates, trusts,

with the federal return, a copy should be attached

the entitled persons.

partnerships, and LLCs that do not have a

to the electing entity’s California return for the

• The cancellation is authorized by a majority of

permanent place of business in California. Foreign

year in which the election is effective. The entity

the managers or members, or the person or

nonresident members covered under R&TC

should file the appropriate California return.

majority of persons that signed the articles of

Section 18666 are not domestic nonresident

organization.

An “ eligible entity ” may choose its classification.

members.

• All payments the LLC has received for

An eligible entity is a business entity that is not a

LLCs with income from both within and outside

interests have been returned to the investors.

trust, a corporation organized under any federal

California must make a reasonable estimate of the

or state statute, a foreign entity specifically listed

The LLC must file SOS Form LLC-4/8, Limited

ratio, to be applied to the distributions, that

as a per se corporation, or other special business

Liability Company Short Form Certificate of

approximates the ratio of California source

Form 568 Booklet 2005 Page 7

Instructions For Form 568 - Limited Liability Company Return Of Income - State Of California Franchise Tax Board - 2005 Page 7

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