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Limited Liability Companies and Tax-Exempt Status

Limited Liability Companies (LLC) seeking tax-exempt status must be owned and operated exclusively by a nonprofit organization. LLCs who have members that are a stock corporation or individuals are not permitted tax-exempt status.

A LLC that is owned and operated exclusively by a nonprofit organization is eligible for tax-exempt status with the Franchise Tax Board if it meets one of the following:

  • Taxable as a corporation with the Internal Revenue Service (IRS) and operates consistently within the desired California Revenue and Taxation Code (R&TC) section under 23701.
  • Qualified for tax-exempt status under R&TC Section 23701h or 23701x as a title holding company.

Once the LLC meets the above eligibility, it must apply for tax-exempt status using Form 3500, Exemption Application, and must provide proof that the IRS has accepted the IRS Form 8832, Entity Classification Election.

Refer to the following table for LLC tax-exempt status eligibility.

LLC treated as a: Classification per Treasury Regulation 7701 and California Regulation 23038 California Tax Factors
Single-member disregarded entity

Defaults to a single-member disregarded entity if there is only one member of the LLC and no election has been made under federal law to be taxed as a corporation using federal Form 8832.

The LLC can apply for tax-exempt status using Form 3500, but is only eligible to apply under R&TC Section 23701h or 23701x.

Unless granted tax-exempt status, the LLC is taxed using Form 568, Limited Liability Company Return of Income.

Partnership

Defaults to a partnership if there is more than one member of the LLC and no election has been made under federal law to be taxed as a corporation using federal Form 8832.

This LLC can apply for tax-exempt status using Form 3500, but is only eligible to apply under R&TC Section 23701h or 23701x.

Unless granted tax-exempt status, the LLC is taxed using Form 568 Limited Liability Company Return.

Corporation for federal purposes

An election has been made under federal law to be taxed as a corporation using federal Form 8832.

The LLC is eligible to apply for tax-exempt status under R&TC Section 23701 using Form 3500.

Unless granted tax-exempt status, the LLC is taxed using Form 568 Limited Liability Company Return.

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Last Updated: 09.10.2018

 

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