Limited Liability Companies and Tax-Exempt Status

A limited liability company (LLC) is eligible for tax-exempt status with the Franchise Tax Board if it meets one of the following:

  • Classified as an association, taxable as a corporation with the Internal Revenue Service (IRS).
  • Qualified for tax-exempt status under California Revenue and Taxation Code (R&TC) Section 23701h or 23701x as a title holding company.

Once classification as an association is established under federal law, the LLC is eligible to apply for tax-exempt status under R&TC Section 23701 using Form 3500, Exemption Application, or Form 3500A, Submission of Exemption Request.

To substantiate the association classification is established, provide one of the following:

  • A copy of the IRS exemption determination letter for the LLC or Form 990, Return of Organization Exempt from Income Tax, that was filed with the IRS.
  • Documentation of approved or accepted IRS Form 8832, Entity Classification Election.

Refer to the following table for LLC tax-exempt status eligibility.

LLC treated as a: Classification per Treasury Regulation 7701 and California Regulation 23038 California Tax Factors
Single-member disregarded entity Defaults to a single-member disregarded entity if there is only one member of the LLC and no election has been made under federal law to be taxed as a corporation using federal Form 8832, Entity Classification Election and tax-exempt status has not been obtained from the IRS under one of the following.
  • Internal Revenue Code (IRC) Section 501(c) using federal Form 1023, Application for Recognition of Exemption Under Section 501(c)(3)
  • IRC Section 501(a) using Form 1024, Application for Recognition of Exemption Under Section 501(a)
The LLC can apply for tax-exempt status using Form 3500, but is only eligible to apply under R&TC Section 23701h or 23701x. The LLC is taxed using Form 568, Limited Liability Company Return of Income unless granted tax-exempt status.
Partnership Defaults to a partnership if there is more than one member of the LLC and no election has been made under federal law to be taxed as a corporation using federal Form 8832 and tax-exempt status has not been obtained from the IRS under one of the following:
  • IRC Section 501(c) using federal Form 1023, Application for Recognition of Exemption Under Section 501(c)(3)
  • IRC Section 501(a) using Form 1024, Application for Recognition of Exemption Under Section 501(a)
This LLC can apply for tax-exempt status using Form 3500, but is only eligible to apply under R&TC Section 23701h or 23701x. The LLC is taxed using Form 568 Limited Liability Company Return of Income unless granted tax-exempt status.
Corporation for federal purposes An election has been made under federal law to be taxed as a corporation using federal Form 8832 or tax-exempt status has been obtained from the IRS under one of the following:
  • IRC Section 501(c) using federal Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code
  • IRC Section 501(a) using Form 1024, Application for Recognition of Exemption Under Section 501(a)
The LLC is eligible to apply for tax-exempt status under R&TC Section 23701 using Form 3500 or Form 3500A. The LLC remains taxable unless tax-exempt status is granted under California law.

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