Corporate Law Avoid minimum franchise tax in corp holding stock

[Worthing]

Jurisdiction

California

Hi, I have a corporation in California, where I am based. I opened this corporation in 2018 specifically to hold a 4.5% shares of a company I helped start in Norway.

Since I was just going to be a silent partner and the company founded in Norway would eventually move a lot of money I did not want to be liable for any loans or other risks they might take over time.

So obviously my corporation in California does not do anything other than pay $800 minimum franchise tax to the CA Franchise Board, and send in the yearly returns to the CA Franchise Board and the IRS.

By 2023 the company in Norway is indeed moving big money, as was expected, but not making a profit. I expect it will continue to have some big debts until after it goes IPO, which might be in 10 years or more. All this was as expected so nothing weird there.

I'm just wondering if anyone could suggest a way for me to continue to hold that 4.5% ownership and stay protected from liability but not have to pay those $800 every year while doing no business whatsoever and no expectation of ever doing business with this company?

Any suggestions appreciated, thanks.

 

[Tax Counsel]

I'm just wondering if anyone could suggest a way for me to continue to hold that 4.5% ownership and stay protected from liability but not have to pay those $800 every year while doing no business whatsoever and no expectation of ever doing business with this company?

Any suggestions appreciated, thanks.

Your headquarters for your LLC is in California because that is where principal officers are, where the major decisions are made, and where any company business is done. In short, with your LLC effectively being located in California despite its Nevada state of incorporation California will subject it to the rules for out of state LLCs doing business in CA, and that draws the $800 franchise tax, same as being instate. So either move to a state that does not impose a franchise tax (and perhaps has lower taxes generally) or dissolve the LLC and hold the Norway shares directly.

If the Norway company is truly a corporation, I would expect it would provide limited liability to shareholders much as U.S. states do. If that is the case (and you'd want to verify that), I'm not really seeing an advantage to you in having a LLC that simply holds a less than 5% interest in another company and does nothing else. You may wish to discuss that with a CA business/tax attorney.

 

[Worthing]

Thanks for your quick reply

Actually, I forgot to clarify that my California corporation is an S-Corp, not an LLC. It is also not incorporated in Nevada, it's incorporated in California directly (not sure where the Nevada part came from).

But I see that for all intents and purposes your answer would be the same anyway right?

In this case the equivalent of an S-Corp in Norway is what is called an Aktieselskap (AS), that's the type of company the Norwegian company is. I'm not actually sure if they are pass-through like an S-Corp. I'd rather not hold the shares directly as I'm not familiar enough with things like banktrupcy in Norway and I don't reside there, so anything would be much more complicated that way if anything went the wrong way.

I could definitely use any suggestions to research though, even if they may sound outlandish Appreciate the ones above, thanks

 

[Tax Counsel]

Thanks for your quick reply

Actually, I forgot to clarify that my California corporation is an S-Corp, not an LLC. It is also not incorporated in Nevada, it's incorporated in California directly (not sure where the Nevada part came from).

But I see that for all intents and purposes your answer would be the same anyway right?

Yes, for the purposes of the franchise tax, the S-corp is treated the same as a LLC and my answer would be the same. California needs lots of money to support all the programs it has, and getting the money for it requires resorting to some taxes that most other states do not.

In this case the equivalent of an S-Corp in Norway is what is called an Aktieselskap (AS), that's the type of company the Norwegian company is. I'm not actually sure if they are pass-through like an S-Corp. I'd rather not hold the shares directly as I'm not familiar enough with things like banktrupcy in Norway and I don't reside there, so anything would be much more complicated that way if anything went the wrong way.

I'm not an expert in Norwegian business entity law and unless I had some good input from a Norway lawyer about the risk exposure I'd have similiar concerns. But in my state there is no annual franchise tax for any form of business. If it's not doing any business, all it pays is a $25 annual filing fee to the Secretary of State that goes along with filing its annual report (which is a simple form for most businesses).