Assume a California resident sets up an out-of-state trust, which in turn is the only member (and manager) of an out-of-state LLC for business in another state (e.g. holding rental properties outside of California). Is there any reason to believe that the California taxpayer in this case will be required to pay the annual $800 minimum franchise tax to California?

There is so much mixed information out there on the CA franchise tax, so it would be really helpful if any kind folks willing to weigh in could do so with authoritative sources of information, e.g. tax code / legislation, previous court cases, or even FTB publications. I've read through quite a bit of those sources myself and have yet to find anything suggesting that the minimum franchise tax would be assessed on this kind of entity structure. And no one I've spoken to has been able to offer a compelling argument otherwise. Yet many claim that there’s no getting around it as a California resident. Obvious disclaimer: I'm not an attorney or accountant. I'm just a dude with an inclination to sort through mixed messages until I get the story straight. And I fully admit I could be missing something- am I?

  • If you've done research on this, then you must know that you haven't provided enough information for anyone to give you a useful answer. Whether the franchise tax applies is very fact specific.
    – minou
    Commented Mar 26, 2021 at 12:02
  • @gaefan - please take a look at my posts on this thread to see why the extent of my research may suggest otherwise: biggerpockets.com/forums/51/topics/… . If you still believe it is fact-specific after reading through those posts, please let me know what makes you think that. thanks
    – R C
    Commented Mar 26, 2021 at 17:30
  • Frankly I'm not sure why you don't call a business attorney in California and ask them. It isn't the sort of question for which they'll charge you just to get an answer.
    – RiverNet
    Commented Mar 27, 2021 at 0:51
  • You’re assuming I haven’t. I’ve spoken with several actually (business, real estate, tax attorneys...). And I’ve heard all sorts of mixed / contradictory opinions. And many don’t even appear to be as informed as I am on the subject from my own independent research. Please see the link I posted in my response above for more context
    – R C
    Commented Mar 28, 2021 at 3:00
  • I don't know that anyone here can help you any better than the attorneys you've already spoken with, but it doesn't hurt to ask. (smile)
    – RiverNet
    Commented Mar 28, 2021 at 3:43

1 Answer 1


Just wait for the state to bill you about it. Asking is like asking a barber if you need a haircut, only one answer is possible for them.

States are broke, California is no exception aside from being one of the only states to ever follow up on their out of state entity requirements.

Look at the actual consequences to guide your compliance, there is likely no criminal liability for non-compliance, likely no issue with limited liability for non-compliance, and the financial penalties simply need to be dealt with when they occur. Corroborate that with your own legal experts, as obviously you couldn't find the answer about how to avoid it but you can find the answer about what happens if you do avoid it.

So when they get around to following up, along side late library book fine enforcement, then you pay.

If you are more cost sensitive and need to avoid the potential of any fees - which I can understand as trusts may have a fixed amount of assets that could be performing poorly - then you may need a different entity structure and strategy.

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