Did six single-member Texas LLCs treated as divisions of a Colorado corporation file separately, and did ownership alone tax the parent?

Plain-English summary

Each single-member Texas LLC filed separately, while ownership alone did not subject the out-of-state corporate member to franchise tax.

The Colorado corporation was sole member of six Texas LLCs treated as operating divisions on its federal return. Section 171.001 nevertheless imposed franchise tax on each Texas-organized LLC, and consolidated or combined reporting was not allowed.

The parent was not taxed merely for membership if it had no Texas certificate of authority and no other Texas activities.

The Comptroller did not explain how the disregarded LLCs computed earned surplus because Rule 3.562 was being revised.

What this means for you

Single-member LLC structures

Federal division treatment did not combine the Texas LLCs into one historical franchise-tax report.

Corporate members

The ownership-only result was conditional on the member lacking both Texas authorization and other Texas activity.

Common questions

Q: How many Texas reports were required?
A: One separate report for each LLC.

Q: Was the Colorado parent taxed solely because it owned them?
A: No, under the stated conditions.

Q: Did the letter provide an earned-surplus method?
A: No.

Citations and references

• Texas Tax Code Sec. 171.001
• 34 Tex. Admin. Code Sec. 3.562

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9712439L

Original ruling text

December 17, 1997

Dear Mr. **:

In your letter of October 17, you requested information regarding the filing of
franchise tax reports for single member limited liability companies (LLCs)
treated as a divisions of a corporation for federal income tax purposes.

You state that your client is a Colorado corporation which is the sole member
of six separate Texas LLCs. The LLCs are treated as operating divisions of the
corporation. Thus, all profit and loss of each LLC is reported on the
corporation's tax return.

First, under Texas Tax Code 171.001 the franchise tax is imposed on each LLC
organized under the laws of Texas. Consolidated or combined reporting of LLCs
or other entities is not allowed. Therefore, each LLC is required to file a
separate franchise tax report.

Second, if the corporation has no certificate of authority from the Texas
Secretary of State and has no other activities in Texas, the corporation is not
subject to the franchise tax merely because it is a member of the Texas LLCs.

Finally, at this time, we are revising Rule 3.562 to address the franchise tax
treatment of LLCs and their members. Thus, I cannot provide you with guidance
regarding the computation of earned surplus for LLCs treated as corporate
divisions until Rule 3.562 is adopted.

This response is based on the facts presented and current law. If there are
different or additional facts, the response may change.

If you have any questions, contact Tax Policy Division. You may call toll free
1-800-531-5441, or our regular number is 512/463-4600. My extension is 3-4662.
You may write me at Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Bob Jeffcoat
Tax Policy Division