Is a single-member New York LLC subject to New York tax, and does owning it make a foreign corporate sole member taxable in New York?

Plain-English summary

A foreign C corporation ("C Corp"), with no taxable presence in New York, plans to form a single-member New York LLC to hold interests in C Corp's foreign affiliates (which operate entirely abroad). The LLC would be a passive holding company -- no New York property, payroll, management, or business; its only New York contacts would be its formation under New York law and a registered agent for service of process. McDermott, Will & Emery asked (1) whether the LLC is subject to New York tax and (2) whether being its sole member makes the foreign corporation taxable in New York.

The Department held that New York follows the LLC's federal classification (citing FGIC CMRC, TSB-A-96(11)C, and TSB-M-94(6)I/(8)C):

• Under the federal check-the-box rules, a single-member entity defaults to being disregarded as separate from its owner unless it elects to be an association. A disregarded single-member LLC owned by a corporation is treated as a branch or division of that corporation.
• If the LLC is disregarded federally, it is not a separate New York entity and is not itself subject to New York tax; and because the LLC has no other New York contact, merely creating it under New York law does not give C Corp a taxable presence under Article 9-A.
• If the LLC elects to be an association, it is a corporation under Tax Law section 208.1 and is subject to Article 9-A.

(The Department noted the result depends on the federal classification rules actually adopted.)

What this means for you

New York classification tracks the federal classification

An LLC treated as a corporation federally is a corporation in New York; one treated as a partnership is a partnership; and a disregarded single-member LLC is treated as part of its owner.

A disregarded passive holding LLC is not a separate taxpayer

If the single-member LLC is disregarded federally and does nothing in New York beyond existing, it is not itself taxed and does not, by its mere formation, create New York nexus for a foreign corporate owner.

Electing association status flips the result

If the LLC elects to be classified as an association for federal purposes, it becomes a corporation under section 208.1 and is subject to the Article 9-A franchise tax.

Common questions

Q: Is a single-member New York LLC a separate New York taxpayer?
A: Only if it is classified as a corporation/association federally. If it is disregarded, it is treated as a branch or division of its owner, not a separate taxpayer.

Q: Does forming the LLC create New York nexus for a foreign corporate owner?
A: Not where the disregarded LLC is a passive holding company with no other New York activity; its mere creation under New York law is not enough.

Q: What if the LLC elects association status?
A: Then it is a corporation under Tax Law section 208.1 and is subject to the Article 9-A franchise tax.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 2 (definitions of "limited liability company" and "partnership and partner")
- Tax Law section 208.1 (corporation includes an association within IRC section 7701(a)(3), including an LLC); section 209.1 (Article 9-A franchise tax)
- IRC section 7701(a)(3); proposed Treas. Reg. section 301.7701-3 (entity classification / check-the-box; default disregarded for single-member entities)
- FGIC CMRC Corp, TSB-A-96(11)C; Department Memorandum TSB-M-94(6)I and (8)C

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1996.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a96_19c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-96 (19) C
Corporation Tax
July 24, 1996

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C960402B

On April 2, 1996, a Petition for Advisory Opinion was received from McDermott, Will &
Emery, 1211 Avenue of the Americas, New York, New York 10036.
The issues raised by Petitioner, McDermott, Will & Emery, are (1) whether a New York
single-member limited liability company ("LLC") is subject to New York tax, and (2) whether a
foreign corporation that is not subject to the franchise tax imposed under Article 9-A of the Tax Law
will become subject to tax because it is the sole member of a New York LLC.
Petitioner submits the following facts as the basis for this Advisory Opinion.
A foreign C corporation ("C Corp") currently does not have a taxable presence in New York.
It is considering establishing an LLC under the New York LLC law. The C Corp will be the only
member of the LLC. The LLC will be used solely to hold various interests in C Corp's foreign
affiliates. These foreign affiliates operate entirely abroad and have no property, employees, or other
activities in the United States. The LLC will function merely as a passive holding company.
The LLC will not have any property, payroll or other activities in New York. All of the
LLC's books and records will be maintained outside of New York by either an LLC employee or
another party (perhaps C Corp) for a fee. Similarly, the management of its activities will occur
outside New York. The LLC will not engage in any business in New York. The LLC's exclusive
New York contact will be its creation under New York law and its designation of a registered agent
in New York to accept service of process as required in New York.
Petitioner states that it is anticipated that for Federal income tax purposes, the Internal
Revenue Service will not treat the LLC as a partnership or an association but will treat it as a branch
of C Corp because the LLC will only have one member and that member will be a corporation.
On May 13, 1996, the Internal Revenue Service proposed Treasury Regulations that would
replace the existing regulations for classifying certain business organizations with an elective regime.
Under proposed section 301.7701-3(a) of the Treasury Regulations, a business entity that is not
required to be classified as a corporation is an eligible entity that can elect its classification for
Federal income tax purposes. A domestic eligible entity that has a single member can elect to be
classified as an association or elect to be disregarded as an entity separate from its owner. Under
proposed section 301.7701-3(b)(1) of the Treasury Regulations, the default classification of an entity

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TSB-A-96 (19) C
Corporation Tax
July 24, 1996

that has a single owner will be that it is not an entity separate from its owner. If the entity wants to
be classified as an association, it must make the election pursuant to proposed section 301.7701-3(c)
of the Treasury Regulations.
Section 2 of the Tax Law provides the definition of certain terms used in the Tax Law. This
section was amended by Chapter 576 of the Laws of 1994 which added the following:
5. The term "limited liability company" means a domestic limited liability company
or a foreign limited liability company, as defined in section one hundred two of the
limited liability company law.
6. "Partnership and partner," unless the context requires otherwise, shall include, but
shall not be limited to, a limited liability company and a member thereof,
respectively.
Section 208.1 of the Tax Law provides that the term "corporation" includes an association
within the meaning of section 7701(a)(3) of the Internal Revenue Code, including an LLC.
Section 209.1 of Article 9-A of the Tax Law imposes the business corporation franchise tax
on every corporation, unless specifically exempt, for the privilege of exercising its franchise, or of
doing business, or of employing capital, or of owning or leasing property in New York State in a
corporate or organized capacity, or of maintaining an office in New York State.
An LLC that is treated as a corporation for Federal income tax purposes is treated as a
corporation for New York State tax purposes. An LLC that is treated as a partnership for Federal
income tax purposes, is treated as a partnership for New York State tax purposes. (See, FGIC
CMRC Corp, Adv Op Comm T & F, April 1, 1996, TSB-A-96(ll)C; and Department of Taxation
and Finance Memorandum, TSB-M-94(6)I and (8)C, October 25, 1994.)
Since it has been established that the classification of an LLC for New York State tax
purposes will follow the classification accorded the LLC for Federal income tax purposes, New York
State would follow the Federal classification of an LLC under the proposed section 301.7701-3 of
the Treasury Regulations.
Following Federal conformity with respect to classifying LLCs, a single member LLC which
is a domestic eligible entity that makes the election pursuant to proposed section 301.7701-3(c) of
the Treasury Regulations to be classified as an association for Federal income tax purposes would
be treated as a corporation pursuant to section 208.1 of the Tax Law and would be subject to tax
under Article 9-A of the Tax Law. Where the single member LLC does not make the election for
Federal income tax purposes pursuant to proposed section 301.7701-3 of the Treasury Regulations,
it would not be classified as an entity separate from its owner. If its owner is a corporation, it would
be considered a branch or division of the owner corporation.

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TSB-A-96 (19) C
Corporation Tax
July 24, 1996

In this case, C Corp is a foreign corporation that does not have a taxable presence in New
York State. C Corp will establish a single member LLC in New York State that will be used solely
to hold various interests in C Corp's foreign affiliates. These foreign affiliates operate entirely
abroad and have no property, employees or other activities in the United States. The LLC will
function merely as a passive holding company and will not engage in any business in New York
State, will not have any property, payroll or other activities in New York State and the management
of its activities will occur outside of New York State.
Accordingly, if the LLC is not classified as a separate entity from C Corp for Federal income
tax purposes, the LLC would not be considered a separate entity for New York tax purposes, and the
LLC itself would not be subject to New York tax. Further, the creation of the LLC under New York
Law would not create a taxable presence in New York State that makes C Corp subject to tax under
Article 9-A of the Tax Law, because the LLC will not have any other contact with New York State.
However, if the LLC elects to be classified as an association for Federal income tax purposes,
pursuant to section 208.1 of the Tax Law, the LLC would be treated as a corporation and would be
subject to tax under Article 9-A of the Tax Law.
It should be noted that, if the proposed section 301.7701-3(a) of the Treasury Regulations is
not adopted for Federal income tax purposes, the classification rules established under the proposed
section would not be followed for New York State tax purposes. The New York State classification
of the LLC would depend on the Federal classification of the LLC for Federal income tax purposes.

DATED: July 24, 1996

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.