Ezel / Tax Rulings / TX
TX 9903582L Franchise Tax (PRIOR TO 01/01/2008) 1999-03-16

Did an Illinois S corporation create Texas franchise-tax nexus merely by owning an interest in a Texas LLC that did business in Texas?

Short answer: No. The Texas LLC filed and paid its own franchise tax, while the Illinois S corporation's only income came from its LLC interest. The Comptroller said mere ownership of a membership interest in an LLC doing business in Texas did not create nexus for the foreign corporate member. The letter also said Texas imposed no individual income tax on the S corporation's shareholders.

Apply this to your situation

This page answers the general question as of 1999. Ezel answers yours, under current Texas tax law, with citations.

Currency note: this ruling is from 1999
Subsequent statutory amendments, regulation changes, court decisions, or later rulings may have changed the analysis. Treat this page as historical context, not current tax advice. Verify current law before relying on any specific rule, rate, or position mentioned here.
Disclaimer: This is an official Texas Comptroller of Public Accounts letter published on the State Tax Automated Research (STAR) system. Letters on STAR can be the basis of a detrimental reliance claim only for the taxpayer to whom the letter was directly issued (see 34 Tex. Admin. Code Rules 3.1 and 3.10); documents on STAR may no longer represent current policy even if not marked superseded. The answer assumes the foreign member's only connection and income was the LLC interest. This 1999 letter applies the pre-2008 franchise tax, later replaced by the margin tax, and predates current entity and nexus rules; confirm present law. Taxpayer-identifying details are redacted. This summary is informational only and is not legal or tax advice. Consult a licensed Texas tax professional about your specific situation.
About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page) is the authoritative source for any reliance.

Plain-English summary

Mere ownership of a membership interest in a Texas LLC did not create franchise-tax nexus for the Illinois S corporation.

The Texas LLC had two members: a Texas corporation and an Illinois S corporation. The LLC filed and paid the appropriate Texas franchise taxes, and the S corporation's only income came from the LLC.

Applying Section 171.001, the Comptroller concluded that the foreign S corporation was not doing business in Texas merely because it held the LLC interest. The letter also stated that the S corporation's shareholders had no Texas individual income-tax responsibility because Texas did not impose that tax.

Currency note: This response predates the margin tax and current nexus rules. Texas replaced the former franchise tax effective January 1, 2008; confirm current treatment of out-of-state LLC members.

What this means for you

Foreign corporations investing in Texas LLCs

On the narrow facts presented, passive membership alone did not attribute the LLC's Texas business to the corporate member.

Tax professionals

The result depends on the absence of other Texas activities or income sources. Additional management, agency, property, or operational facts could change the analysis.

Common questions

Q: Did the Texas LLC itself owe franchise tax?
A: Yes. The letter says it filed and paid the appropriate tax.

Q: Did the Illinois member have Texas nexus?
A: No, based solely on the membership interest described.

Q: Did the shareholders owe Texas individual income tax?
A: No, because Texas did not impose one.

Citations and references

  • Texas Tax Code Sec. 171.001

Source

Original ruling text

March 16, 1999

To: **

Dear Mr. **:

Thank you for your email regarding your client's responsibility for Texas
franchise tax.

You stated in your email that a Texas Limited Liability Company (LLC) has two
members, a Texas corporation and an Illinois S corporation. The LLC files and
pays the appropriate franchise taxes in Texas. The S corporation's only income
is from the LLC.

Texas Tax Code (TTC) Section 171.001 states that a franchise tax is imposed on
"each corporation that does business in this state or that is chartered or
authorized to do business in this state, and each limited liability company
that does business in this state or that is organized under the laws of this
state or is authorized to do business in this state." Based on the information
provided, the S Corporation does not have nexus in Texas and is not subject to
the franchise tax. The mere holding of a membership interest in a limited
liability company that is doing business in Texas does not create nexus for a
foreign corporation.

Texas does not have an individual income tax, so the shareholder(s) of the S
corporation will not have any tax responsibilities in Texas.

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

If you have any questions about this or any other franchise tax matter, you
may call me at 1-800-531-5441, extension 3-4612, or e-mail me at the address
below.

Sincerely,

Janet Spies
[email protected]
Comptroller of Public Accounts

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