Chart 1 STATE TAX TREATMENT OF LIMITED LIABILITY COMPANIES AND LIMITED LIABILITY PARTNERSHIPS Bruce P. Ely / Christopher R. Grissom / Matthew S. Houser Bradley Arant Rose & White LLP Birmingham, Alabama (205) 521-8000 (as of January 3, 2005)

State

Alabama

State Income Tax Classification of LLCs Follows Federal?5

Nonresident Partner/Member Withholding?7

Entity-Level Tax on LLPs or LLCs?3

Citation to LLP/LLC Acts6

Yes1

LLC/LLP pays tax on nonresident member’s/partner’s distributive share of AL income unless nonresident consents filed; but even if consent filed, if nonresident fails to pay the tax, LLC/LLP is contingently liable

Annual $100 minimum and $15,000 maximum business privilege tax (electing family investment LLCs/LLPs subject to $500 annual cap; “financial institution groups” subject to Alabama depositsbased alternative tax capped at $3 million annually)

LLP: Ala. Code §§ 10-8A-1001 to 10-8A-10102, 4

No

No

(check-the-box reg’s followed only for LLCs; LP and LLP classification criteria uncertain)

Alaska

Yes

LLC: Ala. Code §§ 10-12-1, et seq.

LLP: Alaska Stat. §§ 32.06.911 to 32.06.9252, 4 LLC: Alaska Stat. §§ 10.50.010 to 10.50.995

Arizona

Yes1

No

No

LLP: Ariz. Rev. Stat. Ann. §§ 29-1026; §§ 29-1101 to 29-11092, 4 LLC: Ariz. Rev. Stat. Ann. §§ 29-601 to 29-857

1

2 3 4 5 6

7

Indicates that the state taxing authority has publicly announced that it will follow the I.R.S. “check-the-box” regulations for state income tax purposes, the state LLC act adopts the regulations either explicitly or implicitly, or the state adopts them by separate statute. Note that many states, such as Florida (eff. 1/01/03), Georgia, Michigan, and the District of Columbia, do not conform to the “check-the-box” regulations for sales, use, and other related taxes. Indicates “bulletproof” (broad form liability shield) LLP statute, which can result from adopting the 1997 version of the Revised Uniform Partnership Act, known as “RUPA.” Assumes entity is classified as a partnership for federal income tax purposes. See supplemental chart regarding net-worth or debt-based corporate franchise taxes. Indicates that the state has adopted RUPA. The Idaho and Pennsylvania statutes either specifically do not allow or are ambiguous with respect to domestic single member LLCs. Additionally, some states such as California, Delaware, Illinois, and Pennsylvania restrict the use of LLCs by banks and insurance companies. Currently, the following states authorize the formation of limited liability limited partnerships (LLLPs): Arizona, Arkansas, Colorado, Delaware, District of Columbia, Florida, Georgia, Hawaii, Iowa, Maryland, Minnesota, Missouri, Nevada, North Carolina, North Dakota, Pennsylvania, South Dakota, Texas, and Virginia. This column does not list those states which permit, but do not require, composite income tax returns. Copyright © January 3, 2005 Tax Management, Inc./ Bruce P. Ely/ Christopher R. Grissom/ Matthew S. Houser Permission to reproduce this work has been granted by BNA Tax Management and the authors. Legislative updates are welcomed.

1

State

Arkansas

State Income Tax Classification of LLCs Follows Federal?5

Nonresident Partner/Member Withholding?7

Entity-Level Tax on LLPs or LLCs?3

Citation to LLP/LLC Acts6

Yes1

No

No

LLP: Ark. Code Ann. § 4-42-703; §§ 4-46-1001 to 4-46-10032, 4

(eff. 1/01/03, Act 2003965)

LLC: Ark. Code Ann. §§ 4-32-101 to 4-32-1401

California

Colorado

Connecticut

Yes1

Yes

Yes1

LLC/LLP pays tax on nonresident member’s/partner’s distributive share of CA income at 9.3% unless nonresident consents filed; if consents filed, still must withhold 7% (but may request waiver from state)

Annual $800 minimum franchise tax on all LLCs/LLPs; gross receipts tax ranging from $900 to $11,790 on LLCs

LLC/LLP withholds at 4.63%, or pays tax at 4.63% in composite return on nonresident member’s/partner’s distributive share of CO income unless nonresident consents filed

No

LLP: Cal. Corp. Code §§ 16951 to 169622, 4 (listed “professionals” only) LLC: Cal. Corp. Code §§ 17000 to 17655 (not available to listed “professionals”)

LLP: Colo. Rev. Stat. Ann. § 7-60-144; §§ 7-64-1001 to 7-64-10102, 4

LLC: Colo. Rev. Stat. Ann. §§ 7-80-101 to 7-80-1101

LLC/LLP pays tax on LLCs subject to annual LLP: Conn. Gen. Stat. Ann. nonresident “business entity tax” of $250 §§ 34-406 to 34-4342 member’s/partner’s (eff. 1/1/02) distributive share of CT LLC: Conn. Gen. Stat. source income at highest Ann. §§ 34-100 to 34-242 marginal rate unless “group” return filed or certain other exemptions apply; estimated tax payments may also be required depending on amount of member’s/partner’s CT source income (eff. for tax years beginning on or after 1/1/04; Pub. Act 2004-216)

2

State

Delaware

State Income Tax Classification of LLCs Follows Federal?5

Nonresident Partner/Member Withholding?7

Entity-Level Tax on LLPs or LLCs?3

Citation to LLP/LLC Acts6

Yes1

No

LLPs subject to $200/partner/year fee w/ $120,000 cap

LLP: Del. Code Ann. tit. 6, §§ 15-1001 to 15-11052, 4

(legislation to so require withdrawn in 2003 session, HB 31)

District of Columbia

Yes 1

No (The Home Rule Act prohibits the District from taxing personal income, either directly or at the source, of nonresidents. D.C. Code Ann. § 1-206.02(a)(5)).

Florida

Yes 1 (no state personal income tax)

No

LLC: Del. Code Ann. tit. 6, §§ 18-101 to 18-1109

9.975% tax on DC source income earned by unincorporated business but no tax on SMLLC owned by another entity subject to tax in D.C. ($100 minimum) or on professional firms where 80% of income derived from personal services and capital not material income-producing factor

LLP: D.C. Code Ann. §§ 33-110.1 to 33-111.062, 4

LLPs subject to $100/FL partner/year fee w/$10,000 cap

LLP: Fla. Stat. Ann §§ 620.9001 to 620.91052, 4

LLC: D.C. Code Ann. §§ 29-1001 to 29-1075

LLC: Fla. Stat. Ann. §§ 608.401 to 608.705; §§ 621.01 to 621.14 (professionals)

Georgia

Hawaii

Yes 1

Yes 1

LLC/LLP withholds 4% tax on nonresident members/partners distributive share of GA income, with exemptions, unless composite return filed

No

No

No

LLP: Ga. Code Ann. §§ 14-8-44 to 14-8-642 LLC: Ga. Code Ann. §§ 14-11-100 to 14-11-1109

LLP: Haw. Rev. Stat. §§ 425-151 to 425-1732, 4 LLC: Haw. Rev. Stat. §§ 428-101 to 428-1302

3

State

Idaho

Illinois

Indiana

Iowa

State Income Tax Classification of LLCs Follows Federal?5

Nonresident Partner/Member Withholding?7

Entity-Level Tax on LLPs or LLCs?3

Citation to LLP/LLC Acts6

Yes 1

Withholding not required but composite returns permitted for nonresident member/partner individuals; if nonresident fails to pay the tax, LLC/LLP is contingently liable

No

LLP: Idaho Code §§ 531001 to 53-11052, 4

No

1.5% income tax on partnerships and LLCs; partners liable if LLC/LLP fails to pay; “investment partnerships” exempt eff. 1/1/2005

LLP: Ill. Ann. Stat. ch. 805, § 205/8-1; §§ 206/1001 to 206/11052, 4

(Domestic LLPs subject to $100/partner/year fee with a $200 minimum and $5,000 cap)

LLC: Ill. Ann. Stat. ch. 805, §§ 180/1-1 to 180/601 (attorneys may use LLPs or LLCs but remain jointly and severally liable for malpractice of other owners/employees unless adequate insurance carried)

LLC/LLP pays withholding tax on nonresident member’s/partner’s distributive share of IN income at applicable state rate

No

LLP: Ind. Code Ann. §§ 23-4-1-44 to 23-4-1-532

LLC/LLP pays withholding tax on nonresident member’s/partner’s distributive share of IA income at highest state rate unless composite return filed or certificate of exemption obtained by nonresident member/partner

No

Yes 1

Yes1

Yes1

4

LLC: Idaho Code §§ 53601 to 53-672

(eff. 7/01/03, Ill. S. Ct. rules allow use of LLPs by attorneys but see below) (RUPA adopted eff. 1/01/03; S.B. 2049)

LLC: Ind. Code Ann. §§ 23-18-1-1 to 23-18-13-1 LLP: Iowa Code §§ 486.1001 to 486.11052, 4

LLC: Iowa Code §§ 490A.100 to 490A.1601

State

Kansas

Kentucky

Louisiana

State Income Tax Classification of LLCs Follows Federal?5

Yes

Yes1

State classification follows federal classification of LLC but only with respect to corporate income tax, not franchise tax1

Nonresident Partner/Member Withholding?7

Entity-Level Tax on LLPs or LLCs?3

LLC/LLP pays withholding tax on nonresident member’s/partner’s distributive share of KS income at highest state rate unless nonresident consents filed (Kan. Stat. Ann. §79-32,100e, eff. 7/1/03)

LLCs/LLPs subject to LLP: Kan. Stat. Ann. franchise tax on net capital §§ 56a-1001 to 56a-12032, 4 accounts with a $40 min. and $5,000 cap LLC: Kan. Stat. Ann. §§ 17-7662 to 17-76,142

LLC/LLP pays withholding tax on nonresident individual member’s/partner’s distributive share of KY income at the highest state rate unless certain exemptions apply (eff. for tax years ending after 12/31/03; see 103 KY Admin. Reg. 18:070, as amended)

No

LLC/LLP required to make composite tax payments on nonresident partner’s/member’s distributive share of LA income at highest individual state rate unless nonresident consents filed

No

5

Citation to LLP/LLC Acts6

LLP: Ky. Rev. Stat. §§ 362.555 to 362.605

LLC: Ky. Rev. Stat. §§ 275.001 to 275.455 (Ky. S. Ct. rules amended to allow attorneys to use LLCs & LLPs, but must maintain minimum insurance levels)

LLP: La. Rev. Stat. Ann. §§ 9:3431 to 9:3435

LLC: La. Rev. Stat. Ann. §§ 12:1301 to 12:1369

State

Maine

Maryland

Massachusetts

State Income Tax Classification of LLCs Follows Federal?5

Nonresident Partner/Member Withholding?7

Entity-Level Tax on LLPs or LLCs?3

Citation to LLP/LLC Acts6

Yes1

LLC/LLP pays withholding tax on nonresident member’s/partner’s proportionate quarterly share of ME income at highest applicable state rate unless certain exemptions apply (Me. Rev. Stat. Ann. tit. 36, § 5250-B, eff. 1/01/03)

LLC “financial institutions” are taxed at the entity level at a rate of 1% of ME net income and $.08 per $1,000 of ME assets

LLP: Me. Rev. Stat. Ann. tit. 31, §§ 801 to 876

LLC/LLP pays 4.75% tax on nonresident member's/partner’s distributive share of MD income

No

No

No

Yes1

Yes1

LLC: Me. Rev. Stat. Ann. tit. 31, §§ 601 to 762

LLC: Md. Code Ann., Corps. & Ass’ns §§ 4A-101 to 4A-1103

(check-the-box reg’s followed only for LLCs; LP and LLP classifications determined by common law, Kintner reg’s) Michigan

Yes1

LLP: Md. Code Ann., Corps. & Ass’ns §§ 9A-1001 to 9A-11112, 4

LLP: Mass. Gen. L. ch. 108A, §§ 45 to 492

LLC: Mass. Gen. L. ch. 156C, §§ 1 to 69

LLC/LLP pays withholding tax on nonresident member’s/ partner’s distributive share of MI income, unless certain exemptions apply; withholding does not apply to corporate nonresident members/partners (eff. 10/01/03; P.A. 2003-22, -45)

6

Single Business Tax levied at 1.925% of specified LLC tax base (phasing out by 12/31/09)

LLP: Mich. Comp. Laws Ann. §§ 449.44 to 449.48

LLC: Mich. Comp. Laws Ann. §§ 450.4101 to 450.5200

State

Minnesota

Mississippi

State Income Tax Classification of LLCs Follows Federal?5

Nonresident Partner/Member Wihholding?7

Entity-Level Tax on LLPs or LLCs?3

Citation to LLP/LLC Acts6

Yes1

LLC/LLP pays withholding tax on nonresident member’s/ partner’s distributive share of MN income at highest individual rate unless composite return filed

No

LLP: Minn. Stat. §§ 323A.10-01 to 323A.11-052, 4

Generally no, but LLC/LLP and members/partners are jointly and severally liable for any unpaid tax unless LLC/LLP withholds and remits 5% of the LLC’s/LLP’s net profit or gain for the year

No (Miss. Code Ann. § 27-13-1)

LLC/LLP pays withholding tax on nonresident individual member’s/partner’s distributive share of MO income at highest state rate unless either nonresident consents or composite return filed

No

LLC/LLP liable for income tax at applicable state rate for nonresident individual member’s/partner’s distributive share of MT income unless either composite return or nonresident consents filed (Mont. Code Ann. § 15-30-1113)

No

Yes1 (SMLLC’s apportionment factors included in calculation of corp. owner’s franchise tax, but not income tax)

Missouri

Montana

Yes1

Yes1

7

LLC: Minn. Stat. §§ 322B.01 to 322B.960

LLP: Miss. Code Ann. §§ 79-12-87 to 79-12-117

LLC: Miss. Code Ann. §§ 79-29-101 to 79-29-1204

LLP: Mo. Rev. Stat. §§ 358.440 to 358.510; 358.150.22

LLC: Mo. Rev. Stat. §§ 347.010 to 347.189

LLP: Mont. Code Ann. §§ 35-10-701 to 35-10-7102, 4

LLC: Mont. Code Ann. §§ 35-8-101 to 35-8-1307

State

Nebraska

Nevada

State Income Tax Classification of LLCs Follows Federal?5

Nonresident Partner/Member Withholding?7

Entity-Level Tax on LLPs or LLCs?3

Citation to LLP/LLC Acts6

Yes1

LLC/LLP liable for income tax at highest state rate on nonresident individual member’s/partner’s distributive share of NE income unless nonresident consents filed

No

LLP: Neb. Rev. Stat. § 67-344 to 67-346; §§ 67-454 to 67-4652, 4

No

No

No state income tax

LLC: Neb. Rev. Stat. §§ 21-2601 to 21-2653 LLP: Nev. Rev. Stat. §§ 87.440 to 87.560 (“professionals” only if domestic RLLP) LLC: Nev. Rev. Stat. §§ 86.011 to 86.590

New Hampshire

Yes1

No

5% on dividends and interest exceeding $2,400; 8.5% on business profits (only for LLCs/LLPs with more than $50,000 in gross business income); and .75% on the “business enterprise value tax base” of the LLC; however, a dollar for dollar credit is allowed against the business profits tax for the amount of business enterprise tax owed

(conforms to check-thebox reg’s but only with respect to multi-member LLCs)

New Jersey

Yes1

Until 1/01/02, 9% corp. franchise tax imposed at entity level on LLC/LP corp. member’s/ partner’s distributive share of NJ income unless nonresident consents filed (superseded by P.L 2002, Ch. 40)

8

$150/member/partner annual fee w/ $250,000 cap for partnerships with 2 or more members/owners; and LLCs/LLPs must pay 6.37% of their NJ net income allocated to all nonresident noncorporate partners and 9% for all nonresident corporate partners for privilege periods beginning on or after 1/1/02 (54:10A15.11)

LLP: N.H. Rev. Stat. Ann. §§ 304A:44 to 304A:55

LLC: N.H. Rev. Stat. Ann. §§ 304C:1 to 304C:85; §§ 304D:1 to 304D:20 (professional LLCs)

LLP: N.J. Stat. Ann. § 42:1A-47 to 42:1A-542, 4

LLC: N.J. Stat. Ann. §§ 42:2B-1 to 42:2B-70

State

New Mexico

New York

State Income Tax Classification of LLCs Follows Federal?5

Nonresident Partner/Member Withholding?7

Entity-Level Tax on LLPs or LLCs?3

Citation to LLP/LLC Acts6

Yes

LLC/LLP required to withhold tax on nonresident partner’s/member’s distributive share of NM income at a rate to be determined by NM DOR regulation unless nonresident consents filed

No

LLP: N.M. Stat. Ann. §§ 54-1A-1001 to 54-1A11052, 4

Composite returns permitted but LLCs/LLPs having NY source income are required to make quarterly estimated tax payments on behalf of their C corp./nonresident individual owners

$100/member/partner annual fee; w/$25,000 cap; min. $500

Yes1

LLC: N.M. Stat. Ann. §§ 53-19-1 to 53-19-74

LLP: N.Y. Partnership Law §§ 121-1500 to 121-15062 (“professionals” only)

(SMLLCs now subject to annual $100 filing fee) (eff. for tax years beginning in 2003 and 2004; expires 1/01/05; A.B. 2106)

LLC: N.Y. L.L.C. Law §§ 101 to 1403

(eff. for tax years ending after 12/31/02, Laws 2003, Chap. 62) North Carolina

Yes1

LLC/LLP pays withholding tax on individual nonresident member’s/partner’s distributive share of NC income at the applicable individual income tax rate

If book value of LLC assets exceeds $150,000, corp. member required to include LLC's assets, directly or indirectly owned, in its franchise tax base if collective ownership by corp. and its affiliates of capital interests of the LLC is more than 50% (at least 70% for tax years beginning before 1/1/2005)

LLC/LLP pays withholding tax on nonindividual nonresident member’s/partner’s distributive share of NC (eff. 1/01/03, N.C. Sess. Law income at the applicable 2004-74) income tax rate unless nonresident consent filed

9

LLP: N.C. Gen. Stat § 59-84.2 to 59-84.4; §§ 59-90 to 59-94

LLC: N.C. Gen. Stat. §§ 57C-1-01 to 57C-10-07

State

North Dakota

Ohio

Oklahoma

Oregon

State Income Tax Classification of LLCs Follows Federal?5

Nonresident Partner/Member Withholding?7

Entity-Level Tax on LLPs or LLCs?3

Citation to LLP/LLC Acts6

Yes1

No

No (nominal annual filing fee based on number of LLP managing partners)

LLP: N.D. Cent. Code §§ 45-22-01 to 45-22-272, 4

LLC/LLP pays 5% withholding tax on distributions to nonresident individual members/partners and a 8.5% withholding tax on distributions to nonindividual members/partners after certain adjustments unless composite return filed

Franchise tax credit calculations include corporation’s proportionate share amounts from any pass-through entity

LLP: Ohio Rev. Code Ann. §§ 1775.61 to 1775.65

LLC/LLP pays 5% withholding tax on nonresident member’s/partner’s distributive share of OK income (eff. 8/29/03, HB 1356) unless nonresident consents filed (eff. 1/1/04, HB 1556)

No

No

No

Yes1

Yes1

Yes1

LLC: N.D. Cent. Code §§ 10-32-01 to 10-32-156

LLC: Ohio Rev. Code Ann. §§ 1705.01 to 1705.58

LLP: Okla. Stat. Ann. §§ 54-1-1001 to 54-111052, 4 LLC: Okla. Stat. Ann. §§ 18-2000 to 18-2060

LLP: Or. Rev. Stat. §§ 67.500, 67.7702, 4 (“professionals” only) LLC: Or. Rev. Stat. §§ 63.001 to 63.990

10

State

Pennsylvania

State Income Tax Classification of LLCs Follows Federal?5

Yes1

(but statute unclear whether SMLLCs can be disregarded)

Rhode Island

Yes1

Nonresident Partner/Member Withholding?7

Entity-Level Tax on LLPs or LLCs?3

LLCs, except for "restricted LLC/LLP pays professional companies," withholding tax on subject to capital stock tax of nonresident individual .699% of taxable capital and “nonfiling stock value (to be phased out corporate” by 2010) member’s/partner’s distributive share of PA Professional LLCs subject to income at the applicable $300/PA member/year fee; income tax rate (eff. for LLPs subject to $240/PA tax years beginning after partner/year fee 12/31/03, Act 2003-46)

LLP/LLC must withhold at 9% unless it files composite return. (eff. 1/1/04)

$500 tax on LLCs taxed as partnerships (eff. 1/1/04)

Citation to LLP/LLC Acts6

LLP: 15 Pa. Cons. Stat. §§ 8201 to 8221

LLC: 15 Pa. Cons. Stat. §§ 8901 to 8998

LLP: Codified at various sections beginning with R.I. Gen. Laws § 7-12-13 (available to listed “professionals” eff. 7/28/02)

LLC: R.I. Gen. Laws §§ 7-16-1 to 7-16-75 (available to listed “professionals” eff. 7/28/02) South Carolina

South Dakota

Yes1

No state income tax

LLC/LLP pays 5% withholding tax on nonresident member’s/partner’s distributive share of SC income unless nonresident consents or composite return filed

No

No

Domestic LLCs subject to $125 initial report fee; foreign LLCs subject to $550 initial report fee; all LLCs subject to $50 annual report fees thereafter (eff. 7/1/04)

11

LLP: S.C. Code Ann. §§ 33-41-370; 33-41-1110 to 1220

LLC: S.C. Code Ann. §§ 33-44-101 to 33-44-1207

LLP: S.D. Codified Laws Ann. §§ 48-7A-1001 to 48-7A-11052, 4 LLC: S.D. Codified Laws Ann. §§ 47-34-1 to 47-34-59

State

Tennessee

Texas

State Income Tax Classification of LLCs Follows Federal?5

Nonresident Partner/Member Withholding?7

Entity-Level Tax on LLPs or LLCs?3

Citation to LLP/LLC Acts6

Yes1

No

LLC/LLP subject to franchise/excise tax of $0.25 per $100 of net worth & 6.5% of net earnings; corporate member of disregarded SMLLC now subject to TN franchise/excise tax; all entities classified as partnerships also subject to 6% dividends and interest income tax

LLP: Tenn. Code Ann. §§ 61-1-1001 to 61-1-10054

LLCs subject to franchise tax equal to the greater of .25% of capital or 4.5% of earned surplus

LLP: Tex. Bus. Org. Code §§ 152.801 to 152.805

State taxes LLCs as corporations (no state personal income tax)

No

LLPs subject to $200/partner/year fee

LLC: Tenn. Code Ann. §§ 48-201-101 to 48-248-606

(Revised Tex. Partnership Act based on RUPA but differs in some respects) LLC: Tex. Bus. Org. Code §§ 101.001 to 101.552

Utah

Yes1

No

No

LLP: Utah Code Ann. §§ 48-1-41 to 48-1-48 LLC: Utah Code Ann. §§ 48-2c-101 to 48-2c-1902

Vermont

Yes1

Composite returns permitted but LLC/LLP must make estimated tax payments at highest marginal rate on nonresident member’s/ partner’s distributive share of VT income

12

No

LLP: Vt. Stat. Ann. tit. 11, §§ 3291 to 33052, 4

LLC: Vt. Stat. Ann. tit. 11, §§ 3001 to 3162

State

Virginia

State Income Tax Classification of LLCs Follows Federal?5

Nonresident Partner/Member Withholding?7

Entity-Level Tax on LLPs or LLCs?3

Citation to LLP/LLC Acts6

Yes1

No

No

LLP: Va. Code Ann. §§ 50-73.132 to 5073.1432, 4 LLC: Va. Code Ann. §§ 13.1-1000 to 13.1-1073; §§ 13.1-1100 to 1123 (professionals)

Washington

State taxes LLCs as partnerships (no state personal income tax)

No

B&O Tax of 0.138% to 1.5% of gross income

LLP: Wash. Rev. Code §§ 25.05.500 to 25.05.570 4 LLC: Wash. Rev. Code §§ 25.15.005 to 25.15.902

West Virginia

Wisconsin

Wyoming

Yes

Yes1

No state income tax

LLC/LLP pays 4% withholding tax on nonresident member’s/partner’s distributive share of WV income unless nonresident consents filed

Greater of $50 or 0.70% of “capital” (generally, average balance of partners’ capital accounts per Form 1065)

LLP: W. Va. Code § 47B-10-1 to 47B-10-5

No

LLC/LLPs with more than $4,000,000 in gross receipts are subject to recycling surcharge tax of up to $9,800

LLP: Wis. Stat. §§ 178.40 to 178.532

Greater of $50 or .02% of capital, property, and assets (capital employed)

LLP: Wyo. Stat. §§17-211101 to 17-21-1105

No

LLC: W. Va. Code §§ 31B-1-101 to 31B-13-1203; §§ 31B-13-1301 to 31B-13-1306 (professionals)

LLC: Wis. Stat. §§ 183.0102 to 183.1305

LLC: Wyo. Stat. §§ 17-15101 to 17-15-147; §§ 17-25-101 to 17-25-109 (Close LLCs) (domestic LLCs having one or more members may elect to be either a “flexible LLC” or a “close LLC”) Copyright January 3, 2005. Tax Management Inc./Bruce P. Ely/Christopher R. Grissom/Matthew S. Houser. All Rights Reserved. This chart is necessarily only a summary of the applicable laws, regulations, and rulings as of the date stated above and should not be relied on as a definitive source of information. Readers should consult their tax advisers and, perhaps, local counsel, regarding the application of state and local law to their particular circumstances. Legislative updates would be most appreciated. Please contact Bruce Ely ([email protected]; (205) 521-8366), Chris Grissom ([email protected]; (205) 521-8514), or Matt Houser ([email protected] (205) 521-8680).

13

Chart 2

TAX TREATMENT OF LLCs/LLPs/LPs (“LLEs”) BY STATES IMPOSING NET WORTH- OR DEBT-BASED CORPORATE FRANCHISE TAXES (as of January 3, 2005)

Alabama

APPLY FRANCHISE TAX? 2 YES

Arkansas

NO1

Connecticut

NO1

Delaware

NO

Georgia

NO

Illinois

NO

Kansas

YES

Kentucky

NO

Louisiana

NO

Massachusetts

NO1

Mississippi

NO

Missouri

NO

Nebraska

NO

New Jersey

NO

New Mexico

NO1

N. Carolina

NO

STATE

1 2

NOTE: LLCs, LLPs, and LPs subject to “business privilege tax” based on modified net worth. Sliding rate scale based on apportioned federal net income with $100 min. and $15,000 max. (generally). “Family limited liability entities” subject to $500 cap. ALA. CODE § 40-14A-22.

$2 per $1,000 of net capital accounts located or used in state for the franchise tax on LLCs, LLPs, and LPs. KAN. STAT. ANN. §§ 177647(c) & 56a-1201(c) & 56a-1606.

Note: An LLE’s election under the check-the-box regulations to be taxed as a corporation for federal income tax purposes has no significance in determining whether the LLE is subject to LA franchise tax. LA. DOR Rev. Rul. No. 01-013 (Oct. 1, 2001). LLE electing S corp status not subject to franchise tax. La. Info. Bulletin No. 04-023 (Dec. 1, 2004).

LLCs exempt from franchise tax by statute. N.C. GEN. STAT. § 105114(b)(2). However, a corporate member is now required to include the LLC’s assets in its franchise tax base if the corporate member or its affiliates collectively own 70% or more of the capital interests of the LLC.

Several states impose a de minimis (e.g., $109 Arkansas, $250 Connecticut, $200 Delaware; $500 Massachusetts, $50 New Mexico, and $250 Rhode Island) annual franchise tax/filing fee on LLEs. As a general rule, states that follow the federal income tax classification guidelines for LLEs will impose a net worth- or debt-based franchise tax only on those LLEs treated as C corporations.

14

Chart 2

Ohio

APPLY FRANCHISE TAX? 2 YES

Oklahoma

NO

Pennsylvania

YES

Rhode Island

NO1

S. Carolina

NO

Tennessee

YES

Texas

YES

W. Virginia

YES

Wyoming

YES

STATE

NOTE: “Qualifying pass-through entities” are subject to an 8.5% franchise tax on sum of distributive shares of income to: (i) corporations not paying the OH franchise tax; (ii) partnerships which are themselves investors in a pass-through entity if the partnership’s ultimate owners are corporations not paying OH franchise tax; and (iii) trusts which are investors in passthroughs if the beneficiaries are ultimately corporations not paying OH franchise tax. Entity-level tax can be avoided by filing nonresident member jurisdictional consents. OHIO REV. CODE §§ 5733.40 & .41. Franchise tax credit calculations include a corporation’s proportionate share from LLCs and LLPs. OHIO REV. CODE § 5733.057. LLCs exempt from franchise tax by statute. OKLA. STAT. TIT. 68 § 1201. All LLCs except “restricted professional companies” are subject to the capital stock and franchise taxes. 15 PA. CONS. STAT. § 8925. Tax phasing-out by 2009.

LLCs, LLPs, and LPs subject to franchise, excise tax of $0.25 per $100 of net worth. TENN. CODE ANN. §§ 67-4-2105(a), -2106(a). LLCs subject to franchise tax by statute. Tax is based on greater of 0.25% of net taxable capital or 4.5% of earned surplus. TEX. TAX CODE ANN. § 171.002. Generally, the tax is the greater of $50 or 0.70% of capital accounts. W. VA. CODE §§ 11-23-3(b)(2)(C) & 11-23-6. Generally, annual report license tax is the greater of $50 or 0.02% of assets employed in Wyoming. WYO. STAT. §§ 17-15-132(a)(vi) & 17-16-1630(a)

Copyright ©January 3, 2005. Tax Management, Inc./Bruce P. Ely/Christopher R. Grissom/Matthew S. Houser Permission to reproduce this work has been granted by BNA Tax Management. Legislative updates are welcomed.

15

A Section 409A Primer The American Jobs Creation Act of 2004 (H.R. 4520) (the “Act”) changed the landscape with respect to planning for many forms of executive compensation, as well as for broad-based deferred compensation plans. The Act added new Section 409A to the Internal Revenue Code of 1986, as amended (the “Code”), which imposes significant new restrictions on nonqualified deferred compensation plans, enforced by a harsh penalty on the individual employee or director for noncompliance. At the very end of 2004, the Internal Revenue Service (the “Service”) issued Notice 2005-1 (the “Notice”) that clarified certain provisions of Section 409A and provided, for the most part, rather generous transition provisions that essentially give employers and their service providers until the end of 2005 to bring their compensation arrangements into compliance with Section 409A. I.

Overview. Section 409A provides that amounts deferred under a nonqualified deferred compensation (“NQDC”) plan are includible in gross income when earned, to the extent not subject to a substantial risk of forfeiture, unless certain requirements related to the deferral, distribution and funding of the NQDC are met. A.

General scope of coverage. Section 409A broadly defines a “nonqualified deferred compensation plan” as any plan or arrangement that provides for the deferral of compensation. A plan provides for the deferral of compensation if the service provider has a legally binding right during a taxable year to compensation that has not been received and included in gross income and that is payable to the service provider in a later year. It is important to note that a service provider may have a “legally binding right” to receive compensation without that compensation actually being vested (But see § I.D.3 below regarding substantial risks of forfeiture). Despite the broad general definition of “nonqualified deferred compensation plan,” several exceptions significantly reduce the effective scope of Section 409A.

B.

Short-term deferrals. The short term deferral of compensation does not cause that compensation to be considered “deferred” under Section 409A. This rule applies if the plan requires, absent a contrary election, that compensation be paid (and the compensation actually is paid) by March 15 of the year following the calendar year in which the compensation vests (or, if later, by the fifteenth day of the third month after the close of the payor’s taxable year in which the compensation vests). If a deferral election is made with respect to the compensation, the compensation will be subject to all of the rules of Section 409A.

C.

Stock options, stock appreciation rights (“SARS”) and other equity-based compensation. While “deferred compensation” includes the grant of a stock option, SAR and other equity-based compensation, grants of such

equity compensation are generally not subject to Section 409A as long as the “exercise price” of the grant is not less than the fair market value of the underlying stock at grant. Remember that failure of equity flavored compensation to meet the standards of 1-3 below simply means that the compensation must otherwise meet the requirements of Section 409A – e.g. the issuance of a stock option having an exercise price below its fair market value on the grant date will not be taxable at grant as long as there is a fixed date on which the option must be exercised (as described in Section IV.D below) and all of the other requirements of Section 409A are met. 1.

Stock options. Nonqualified stock options are not subject to Section 409A if the amount required to purchase the stock under the option (the exercise price) may never be less than the fair market value of the underlying stock on the grant date of the option. In addition, the receipt, transfer or exercise of the option must be governed by Section 83 of the Code and the option must not include any other feature for the deferral of compensation other than through the exercise of the option during its term. Note, that incentive stock options granted pursuant to Section 422 of the Code and stock purchase rights granted pursuant to Section 423 of the Code do not constitute a deferral of compensation.

2.

SARs. The Notice grants two safe harbors for SARs to remain outside the scope of Section 409A. a.

Public company SARs. If the issuing company’s stock is publicly traded, then SARs that is issues are not subject to Section 409A if (i) the SAR exercise price may never be less than the fair market value of the underlying stock on the grant date, (ii) only the publicly traded stock of the issuer may be delivered in settlement of the SAR, and (iii) the right does not include any deferral feature other than through the exercise of the SAR during its term.

b.

Existing program. Until further guidance is issued, a payment of case or stock pursuant to the exercise of a SAR where such right was granted pursuant to a program in effect on or before October 3, 2004, will not be treated as a payment of deferred compensation as long as (i) the SAR exercise price may never be less than the fair market value of the underlying stock on the grant date, and (ii) the right does not include any deferral feature other than through the exercise of the SAR during its term.

3.

D.

Restricted Property. Property transfers subject to Section 83 do not result in a deferral of compensation merely because the value of the property is not includible in income in the year of receipt under the rules of that Section.

Other important concepts. 1.

Partnerships. Section 409A may apply to arrangements between a partner and a partnership which provides for the deferral of compensation. The Notice provides that until further guidance is issued, taxpayers may treat the issuance of a partnership interest (including a profits interest), or an option to acquire a partnership interest, granted in connection with the performance of services under the same principles that govern the issuance of stock.

2.

Plan concepts. The definition of a “plan” for Section 409A purposes is one instance where the Notice provides a particularly unfriendly result. All arrangements between a service provider and a service recipient are aggregated into one of three plans: (i) account balance plans, (ii) nonaccount balance plans and (iii) plans that are neither account balance nor nonaccount balance plans (e.g. equity-based compensation plans). In other words, each service provider can have no more than three “plans” in effect with any one service provider. In the event one arrangement within a plan runs afoul of Section 409A, all compensation arrangements within the same plan attract the punitive provisions of Section 409A. For example, if a restricted stock unit grant to a service provider in Year 1 meets the requirements of Section 409A, but the restricted stock unit grant in Year 2 fails the tests of Section 409A, all compensation deferred under the “other equity-based compensation plans” of the service provider, including the restricted stock unit grants from both Years 1 and 2, becomes immediately taxable. Account balance plans are conceptually equivalent to so-called defined contribution plans. Nonaccount balance plans are conceptually equivalent to defined benefit plans.

3.

Substantial risk of forfeiture. Compensation is subject to a substantial risk of forfeiture if entitlement to the amount is conditioned on the performance of substantial future services by any person or the occurrence of a condition related to a purpose of the compensation, and the possibility of forfeiture is substantial. Covenants not to compete do not create a substantial risk of forfeiture for purposes of Section 409A. Where the service provider owns a significant amount of the stock of the service

recipient, the Service will examine the facts and circumstances to determine whether the real possibility of forfeiture is substantial. E.

II.

Penalties for noncompliance. If the requirements of Section 409A are not met in a particular taxable year, participants with respect to whom the requirements are not met will encounter the following tax consequences: •

All compensation (plus earnings) deferred under the plan in that and all preceding years will be taxable to the extent not then subject to a substantial risk of forfeiture (i.e., vested);

•

An additional tax of 20% of all compensation (plus earnings) that is includible in income will be levied; and

•

An interest penalty will be assessed on tax underpayments in prior years computed as if the deferred compensation had been included in income when first vested.

Elections. In general, Section 409A provides that a participant’s election to defer compensation under a nonqualified deferred compensation plan must be made before the beginning of the calendar year in which the services for which the compensation is paid are performed. Example. A participant in a deferred compensation plan wants to defer compensation for services to be performed during 2006. The deferral election must be made on or before December 31, 2005. This requirement exists even if the period of service for which the compensation is granted does not begin until October of 2006. A.

Time and form of distribution. Under § 409A, the time and form of a distribution from a nonqualified deferred compensation plan must generally be elected at the same time as the deferral election is made. This is a major change from the common practice at present of allowing an election as to the form or time of payment at any time before the calendar year during which the distribution is scheduled to occur. This change may be the most disruptive of all the new provisions. Example: An employee age 40 makes an elective deferral of part of her 2005 salary under a nonqualified deferred compensation plan. The plan provides for distribution either at age 50 or upon retirement (or other termination of employment). The payment may be made in a lump sum or in installments over 5 years. The election for time and form of payment of 2005 deferrals must be made before January 1, 2005. Example: A supplemental executive retirement plan provides for payout at retirement in a lump sum, an annuity of equivalent value or installments

over 10 years. The election as to form of payment must be made at the time an executive is selected to participate in the plan rather than at retirement. A provision leaving this selection to be made by the Board of Directors at the executive’s retirement date is not permissible. B.

Newly Eligible Participants. A newly eligible participant in a nonqualified deferred compensation plan, however, may make his or her initial election to defer compensation within 30 days of the participant becoming eligible to participate in the plan. Example. An employee first becomes eligible to participate in a deferred compensation plan on March 15, 2005. The initial deferral election covering compensation during 2005 may be made as late as April 14, 2005, but it will apply only to compensation for services performed after the date of the election. Thus, if the company has a monthly payroll period ending on the last day of the month, the election will be effective for May compensation.

C.

Performance-based compensation. Elections regarding performance-based compensation that is derived from services performed over a period of at least twelve months must be made no later than six months before the end of the performance period. The legislative history indicates that “performance-based compensation” will be defined as (i) variable and contingent on the satisfaction of pre-established company or individual performance criteria and (ii) not readily ascertainable at the time of the election. Further, the definition will require satisfaction of some, but not all, of the criteria under section 162(m) of the Code (dealing with the $1,000,000 limitation on deductible compensation to certain executives of public companies). Example. The company pays a bonus in February 2006 based on service and performance of an employee during calendar 2005. In order to defer this bonus, if it is not “performance-based”, the employee must make a deferral election by December 31, 2004 (the period of service is January 1 – December 1, 2005), even though payment is not until 2006. If the bonus meets the definition of performance-based compensation, the deferral election can be made as late as June 30, 2005. The IRS may provide some transitional relief for this situation.

D.

Temporary Relief. With respect to deferrals subject to Section 409A that related all or in part to services performed on or before December 31, 2005, the requirements relating to the timing of elections will not be applicable to any elections made on or before March 15, 2005, provided that (i) the amounts to which the deferral election related have not been paid or become payable a the time of election, and (ii) the plan under which the deferral election is or was made was in existence on or before

December 31, 2004, (iii) the plan is otherwise operated (and amended, if necessary) in accordance with Section 409A. III.

Distributions. Distributions under a nonqualified deferred compensation plan are permitted only for the following reasons: A.

Death.

B.

Disability. A participant is considered disabled if the participant is unable to engage in any substantial gainful activity by reason of a condition which can be expected to last not less than 12 months, or if the employee is receiving benefits for not less than three months under an employer accident and health plan.

C.

Separation from service. A participant may receive a distribution from a nonqualified deferred compensation plan upon a separation from service. Under a special rule, certain executive employees of publicly traded companies must wait at least six months from the date of their separation from service to receive a distribution. Example: An executive of a public company enters an employment agreement providing for a lump sum payment 30 days following an involuntary termination of her employment. If the executive is a “key employee” (as defined in the top-heavy rules for qualified retirement plans), the severance payment is not permissible because it must be paid at least six months after separation from service.

D.

Specified time of fixed schedule. At the time the compensation is granted (or at deferral, if made in accordance with § 409A), a participant may specify a time certain, or a fixed schedule, at which the participant will receive the distribution from the NQDC plan. The participant must choose a currently determinable date, rather than an uncertain event. Example: A nonqualified deferred compensation plan provides that a distribution is allowed when a participant’s child enters college. This is not permitted because the distribution is payable upon the occurrence of an event and not at a specified time. Example: A nonqualified deferred compensation plan provides that a distribution is allowed on the earlier of (i) termination of employment or (ii) attaining age 55. Since each of the alternative distribution triggers is permissible, it is expected that such a provision will be permissible.

E.

Change in control or change in ownership of substantial portion of corporation’s assets. The Notice essentially adopts the Section 280G (golden parachute) definition of a change of control. Generally, a change

in control occurs if a person, or persons acting together, acquire (together with stock held by such person or group) more than 50 percent of the vote or value of the service recipient’s stock. A change in effective control occurs when a person or group acquires 35 percent of the voting control of the service recipient over a 12 month period. A change in ownership of a substantial portion of a corporation’s assets occurs if a person or group acquires 40 percent or more of the service recipient’s gross assets over a twelve month period. Note that the Notice limits the change in control definition to corporations. Thus, it appears that participants in nonqualifed deferred compensation plans of noncorporate entities may not obtain a distribution from the plan in the event of a change in control of the entity without running afoul of Seciton 409A. F.

IV.

Unforeseeable emergency. Section 409A strictly limits these instances, which include events such as a severe financial hardship resulting from an illness or accident.

Changes in the Time and Form of Distributions Many nonqualified deferred compensation plans allow participants to make a later election to delay a scheduled distribution past the date provided for in the initial deferral election. Section 409A now requires that such a subsequent election (i) may not take effect until at least 12 months after the date that such subsequent election was made; (ii) the election must delay the original distribution date1 for at least five years (except in the case of elections relating to distributions on account of death, disability or unforeseeable emergency); and (iii) the election to delay a distribution upon reaching a specified time or pursuant to a fixed schedule must be made at least twelve months prior to the original distribution date provided for in the initial deferral election. Furthermore, there can be no acceleration of the time or schedule of payment of any of the benefits. Example: A participant defers salary during 2005 through 2010, electing that it be distributed in installments over 5 years commencing on June 1, 2012 (his 55th birthday). On January 1, 2011, he elects instead a distribution in a lump sum on June 1, 2017 (his 60th birthday). The new election will take effect on January 1, 2012. This election is permissible because it is made more than 12 months before the original distribution event (which would have occurred on June 1, 2012), is not effective for 12 months, defers the commencement of payments at least 5 years and does not accelerate any payment. However, this election will not be permissible if the technical correction described in footnote 1 is enacted because every installment will have to be delayed for at least 5 years.

1

A provision in the technical corrections bill, which is likely to be enacted, would require that all payments, instead of just the first payment, be delayed at least 5 years.

Example: The facts are the same as in the example above except that the participant’s initial election is for distribution in installments over 10 years commencing on June 1, 2012. A subsequent election to receive a lump sum payout on June 1, 2017 is not permissible because it would accelerate the payment of part of the 10-year installment payout. V.

Acceleration of Payments. Except in very limited circumstances, a plan may not permit the acceleration of the time or schedule of any payment under the plan. Most of this exceptions deal with compliance with domestic relations orders and certain conflict of interest requirements. The most significant exception is for de minimis amounts that do not exceed $10,000. A plan may provide for the accelerated distribution of this amount as long as it accompanies the termination of the entirety of the participant’s interest in the plan.

VI.

Funding of Nonqualified Deferred Compensation Plans. One common way to provide a form of funding for nonqualified deferred compensation plans is for the employer to transfer assets into a trust that is subject to the claims of the employer’s creditors. The IRS has issued a lot of rulings to the effect that these trusts do not cause the deferred compensation to be immediately taxable. In theory, a trust of this kind (called a “rabbi trust”) is of no help to participants if the employer goes bankrupt. Some employers have established rabbi trusts offshore to make assets more difficult for creditors to reach. Another technique has been to provide that the assets are placed beyond the reach of creditors if the employer’s financial condition deteriorates. If the specified financial trigger should occur, the deferred compensation benefits would be immediately taxable, but would be preserved from the claims of creditors. Under Section 409A, assets set aside or transferred to a trust (including a “rabbi trust”) located outside of the United States for the purpose of paying nonqualified deferred compensation will subject each participant to immediate taxation on the assets (as well as the additional interest and 20% penalty tax). In addition, assets set aside in a rabbi trust onshore to fund a nonqualified deferred compensation plan will become immediately taxable upon deferral (or, if later, when the deferral vests) if the plan provides that such assets will become restricted (or the assets actually become restricted) so that they may only be used to pay benefits under the plan in connection with a change in the employer’s financial health. In short, rabbi trusts will still work, but they must be onshore and must not contain a financial health trigger.

VII.

Grandfathered Arrangements. Section 409A is effective with respect to (i) amounts deferred in taxable years beginning after December 31, 2004, and (ii) amount deferred in taxable years beginning before January 1, 2005 if the plan under which the deferral is made is materially modified after October 3, 2004. A.

Earnings. Section 409A is effective with respect to earnings on amounts deferred only to the extent that Section 409A is effective with respect to

the amounts deferred.

VIII.

B.

“Earned and vested.” For purposes of applying the effective date provisions, an amount of compensation is considered deferred before January 1, 2005 if (i) the service provider has a legally binding right to be paid the amount, and (ii) the right to the amount is earned and vested. Thus, benefits that were not vested as of December 31, 2004, even if they were granted several years prior to that date, will become subject to Section 409A.

C.

Material Modification. A modification of a plan is a material modification if a benefit or right existing as of October 3, 2004 is enhanced or a new benefit or right is added. Such benefit enhancement is a material modification whether it occurs pursuant to an amendment or the service recipient’s exercise of discretion under the terms of the plan. It is not a material modification to adopt an amendment to conform the plan to Section 409A. It is not a material modification for a participant to exercise a right permitted under the plan as in effect on October 3, 2004.

Transition Relief. The Notice generally provides generous transition relief that gives companies until the end of 2005 to bring their plans into compliance with Section 409A. An important, overarching pre-requisite to this transition relief is that the plan be operated in good-faith compliance with Section 409A during 2005. Because a modification of an existing plan to bring it into compliance with Section 409A is not a material modification, a threshold question for many companies will be whether to seek to preserve amounts grandfathered under preSection 409A rules, or to use the transition rules available to bring all amounts into compliance with the new rules. A.

Payment elections. A plan may be amended to provide for new payment elections (without regard to the acceleration or redeferral provisions of Section 409A) with respect to amounts deferred prior to the election. This relief applies to those amounts that otherwise comply (or are brought into compliance) with Section 409A.

B.

Equity-based compensation. Provided that the cancellation and reissuance occurs on or before December 31, 2005, it will not be a material modification to replace a stock option or SAR with a below-fair market value exercise price with such an option or SAR having an exercise price of not less than its fair market value at grant.

C.

Termination of participation. A company may choose to allow its plan participants to revoke all elections, terminate their participation in any plan adopted prior to December 31, 2005 and receive a distribution of the balance of their plan. The revocation and termination will not be considered a modification or otherwise fail Section 409A’s requirements

as long as the revocation and termination occur in 2005. All amounts subject to the revocation must be included in gross income for 2005 (or, if later, the year in which the compensation becomes earned and vested). 1. Employer termination. The service recipient can generally terminate plans with respect to some, all or none of its participants generally until December 31, 2005. 2.

2549954.1

Employee elections. Care should be exercised in giving employees any ability to choose to terminate participation in the plan because they may find that they have just constructively received those amounts even if they elect not to terminate.