DIRECTIVE

Subject: Nexus and Filing Obligations of Corporate Members of LLCs
Tax: Corporate Income and Franchise Tax
Statutes: G.S. 105-130.3 and 105-122
Issued By: Corporate Income, Excise, and Insurance Tax Division
Date: May 31, 2002
Number: CD-02-1

This directive clarifies the Department of Revenue's position concerning nexus and filing obligations of corporate members of limited liability companies (LLCs). The Department of Revenue announced in an earlier Technical Advice Memorandum (CTAM-97-3) that it recognizes the Internal Revenue Service "check-the-box" regulations for corporate income tax purposes. Under the federal regulations, an LLC that is not mandatorily classified nor elects to be classified as a corporation is classified by default as a partnership if it has two or more members. A single-member LLC that is not mandatorily classified nor elects to be classified as a corporation is disregarded as an entity separate from its single owner.

A corporate member of an LLC doing business in North Carolina has nexus in North Carolina. Not every corporate member of an LLC doing business in North Carolina is required to file North Carolina corporate income and franchise tax returns, however. Whether the corporate member of an LLC doing business in North Carolina is required to file a North Carolina corporate income and franchise tax return depends on two factors -- the LLC's entity classification and the corporate member's other activities in this State.

If an LLC is treated as a partnership or is disregarded as an entity separate from its owner for federal income tax purposes, the corporate member is required to file a North Carolina corporate income and franchise tax return even if it has no other activities in this State. This is because the LLC's income, assets, and activities flow through to the corporate member. The treatment of a corporate member of an LLC that is treated as a partnership is identical to the treatment of a corporation that is a partner in a partnership. See administrative rules 17 NCAC 5C .0102(b) and 5C .1701.

If the LLC is treated as a corporation for federal tax purposes and the corporate member's only connection to North Carolina is its ownership interest in the LLC, the corporate member is not required to file a North Carolina corporate income and franchise tax return even though the corporate member has nexus in North Carolina as a result of its membership in the LLC. The corporate member is not required to file in this circumstance because the LLC reports its North Carolina income at the entity level and the apportionment attributes of the LLC do not flow through to the corporate member as is the case when the LLC is disregarded or is treated as a partnership. The corporate member, therefore, does not have a corporate income or franchise tax filing obligation unless it conducts other activities that subject it to North Carolina's franchise tax or income tax.

If you have questions about this directive, you may call the Corporate, Excise, and Insurance Tax Division of the North Carolina Department of Revenue at (919) 733-8510. You may also write to the Division at P.O. Box 871, Raleigh, N.C., 27602-0871.