Should a new investment manager and its funds be limited partnerships or LLCs for California and Texas tax purposes?

Three entities, three decisions

A new manager usually forms a management company, which earns fees; a general partner or carry vehicle, which holds the profits interest in each fund; and the funds. A Delaware limited partnership and a Delaware LLC classified as a partnership are both partnerships for federal income tax purposes (the principals' own federal treatment, such as self-employment tax, can differ by form and is outside this article). The form is decided entity by entity: in California the difference falls on every LLC in the structure, in Texas on the fund and the carry vehicle.

California: the annual tax is the same; the fee and the timing are not

Both forms pay $800 when a trigger is met: a limited partnership under section 17935 if it is doing business in California, has filed a certificate of limited partnership, or is a foreign limited partnership that has registered; an LLC under section 17941 on parallel triggers (doing business, articles accepted, registration issued). Entities whose first taxable year began in 2021 through 2023 were exempt (sections 17935(f)(1), 17941(g)(1)); nothing replaced that exemption, so a first taxable year beginning in 2024 through 2026 carries the full $800. For a first taxable year beginning on or after January 1, 2027 and before January 1, 2030, each form pays $400 (sections 17935(f)(2), 17941(g)(2)), as does a limited liability partnership, which has the same annual tax and no LLC fee (section 17948). An entity that does no business in a taxable year of 15 days or less owes nothing for it, and the LLC's relief reaches "the taxes and fees" (sections 17936, 17946); no source reviewed says how that rule and the $400 interact for the following year, and this article does not join them.

Timing differs. An LLC's tax is due by the 15th day of the fourth month of its taxable year, on form FTB 3522, so it is a prepayment (section 17941(c)). A limited partnership's tax is due with its return, by the 15th day of the third month after year end; an extension of the return does not extend the time to pay, and the extension payment goes with form FTB 3538 (section 17935(c); 2025 Instructions for Form 565).

The larger difference is the fee, which section 17942 imposes on "every limited liability company subject to tax under Section 17941." It is measured by total California income: gross income (section 24271) plus cost of goods sold, assigned under the sales rules of sections 25135 and 25136 with the provisions that exclude receipts from the sales factor switched off (section 17942(b)(1)(A), (B)). The brackets run from $900 at $250,000 to $2,500 at $500,000, $6,000 at $1,000,000 and $11,790 at $5,000,000, with no reduction for compensation. The base is gross income, not gross receipts: for a fund's securities sales, the gain. A limited partnership owes no fee. The estimated fee is due by the 15th day of the sixth month, with a 10 percent underpayment penalty unless the amount paid by then equals or exceeds the preceding year's fee (section 17942(d)).

Two features of the base matter to a manager. Fees are assigned to California where the purchaser receives the benefit of the service (section 25136(a)(1)), not where the manager's people sit; the library's asset management fee article covers the assignment. And the fee reaches a lower-tier partnership's gross income: the statute excludes only amounts from another LLC already subject to the fee (section 17942(b)(1)(A)), while the Schedule IW instructions have an LLC member report its distributive share of the income items of a pass-through entity other than an LLC from Schedule K-1 (565), grossed up by the Table 3 add-backs (its share of cost of goods sold, deductions and rental income). An LLC general partner of a limited partnership fund therefore includes its share of the fund's gross California-assigned income in its own base; a limited partnership general partner owes no fee on it.

California: nonresident members (LLC only)

An LLC classified as a partnership files with its return each nonresident member's agreement to file a California return, pay tax on the LLC's income and accept California's jurisdiction to collect it (section 18633.5(e)(1); form FTB 3832). If an agreement is not timely filed, the LLC pays tax for that member at the highest marginal rate under section 17041 (the corporate rate for a corporate member) on the member's distributive share of California source income, less tax withheld, and may recover it from the member. Section 18633, which governs limited partnership returns, has no counterpart. The consent sits beside nonresident withholding (section 18662), which the library's investment partnership article covers.

California: doing business does not depend on form

The annual tax turns on doing business under section 23101, in either form. Subdivision (a) is the activity test: "actively engaging in any transaction for the purpose of financial or pecuniary gain or profit." Under subdivision (b), for taxable years beginning on or after January 1, 2011, a taxpayer is also doing business if it is organized or commercially domiciled in California, or if its California sales, property or payroll exceed the lesser of an indexed amount or 25 percent of its total, counting its distributive share of partnerships below it (subdivision (d)). The 2025 amounts are $757,070 of sales and $75,707 each of property and payroll; the FTB indexes them annually, and its published table stops at 2025. Commercial domicile is "the principal place from which the trade or business of the taxpayer is directed or managed" (section 25120(b)), so a management company directed from California is doing business here under subdivision (b)(1) before any threshold is computed; one with its people elsewhere can still be under (b)(2) through its California-assigned fees.

The FTB's 2025 booklets add that general partners "are considered doing business in California if the partnership is doing business in this state," and that a partnership is doing business here if a general partner does so on its behalf. That is the FTB's stated position, not statute. The library's passive investor article reports that, after the Bahl Media settlement, the FTB agreed to correct its guidance on the member rule and had posted none as of October 9, 2026; a taxpayer's likely argument is that the general partner rule rests on the same aggregate theory. This article does not say that a general partner entity with no California activity of its own is doing business by status alone. A general partner acting from California for a fund doing business here is doing business on its own activity.

California: Secretary of State registration is a separate test

Registration is a Corporations Code question with its own definition. A foreign limited partnership "may apply for a certificate of registration" (Corp. Code section 15909.02(a)); a foreign LLC "may apply" in the same words (section 17708.02(a)). Neither states a mandate; the duty is enforced through consequences. Both definitions of transacting intrastate business turn on "repeated and successive transactions of business in this state, other than interstate or foreign commerce" (section 15901.02(ai)(1); section 17708.03(a) reads "other than in interstate or foreign commerce"), list similar excluded activities (internal affairs, bank accounts, debt, an isolated transaction completed within 180 days), and exclude status as a limited partner, shareholder, or LLC member or manager, but not status as a general partner (sections 15901.02(ai), 17708.03). Whether a foreign general partner with no activity of its own transacts intrastate business by acting for a California-active partnership is open; no source reviewed answers it. Both definitions also state that they do not decide what may subject an entity to taxation, so an entity can owe the annual tax without transacting intrastate business, and the reverse.

Registration has its own tax consequence: a registered foreign limited partnership or LLC owes the $800 every year until it cancels, whether or not it does business (sections 17935(b)(1), 17941(b)). An unregistered foreign entity required to register cannot maintain an action in California, while its owners are not made liable by that failure alone, and a limited partnership's contracts remain valid (sections 15909.07(b) to (e); for an LLC, section 17708.07). Penalties differ by form: a limited partnership faces $20 a day up to $10,000 (section 15909.07(c)); the LLC provisions carry no daily penalty (sections 17708.06 to 17708.09). An LLC's penalty is in the Revenue and Taxation Code: a foreign LLC doing business in California that fails to register and then fails to file within 60 days after the FTB's notice and demand owes $2,000 per taxable year absent reasonable cause (section 19135), a section that does not mention limited partnerships. A registered LLC also files a statement of information within 90 days and every two years after (section 17702.09); the limited partnership provisions reviewed carry no equivalent. No penalty for a late statement is stated here.

California: the fund vehicles

For funds, the form matters to the fee and the member consent, not to investor sourcing, which turns on the 90 percent tests of sections 17955 and 23040.1 (the library's investment partnership article covers those and withholding). A fund LLC doing business in California owes the fee on its gross California-assigned income even when its nonresident investors owe nothing; a fund limited partnership owes only the $800.

Texas: both forms are taxable; only a partnership can be passive

Texas taxes "each taxable entity that does business in this state or that is chartered or organized in this state" (Tex. Tax Code section 171.001(a)), and limited partnerships and LLCs are both taxable entities (section 171.0002(a)). What separates them is the passive entity exclusion (section 171.0002(b)), which section 171.0003(a)(1) limits to "a general or limited partnership or a trust, other than a business trust." An LLC cannot be passive, and an LLC that converts to a partnership may not qualify for the year of conversion, because the Comptroller requires the eligible form for the entire accounting period.

For a partnership, income decides: at least 90 percent of federal gross income must come from listed sources (dividends, interest, financial-instrument income, "income from a limited liability company," positive distributive shares of partnership income, gains from securities and exchange-traded commodities, capital gains from real property, and nonoperating mineral income), and no more than 10 percent from an active trade or business (section 171.0003(a)(2), (a)(3)). Fees for services are not listed, so a management company earning management fees fails in either form. A fund partnership earning interest, dividends and securities gains can pass, and so can a carry vehicle organized as a limited partnership whose income is its distributive share of fund income: positive distributive shares are listed, and income described in (a)(2) "may not be treated as income from conducting an active trade or business" (section 171.0003(a-1)). If the fund is an LLC taxed as a partnership, the carry vehicle's income from it is "income from a limited liability company," with the same result. The same vehicle organized as an LLC is taxable whatever its income.

Passive status is a property of the year's income, not of the form: the test runs on federal gross income "for the entire period on which the tax is based" (34 Tex. Admin. Code section 3.582(c)(1)). The Comptroller's likely position is that the general partner's management of the fund is one of the "active management and operational functions" performed on its behalf by the manager's people, and that the carried interest is an asset used in the active business of related entities (section 171.0004(b) to (d)). On the text, that changes the result only where the general partner has income outside subdivision (a)(2), because (a-1) keeps a distributive share out of the active count. The exposure is characterization: a guaranteed payment under Internal Revenue Code section 707(c) is not one of the "distributive shares of partnership income," and a management or administrative fee paid to the general partner is service income; either counts against the 10 percent limit. No Comptroller pronouncement reviewed addresses general partners, fees or service income, so the Comptroller's treatment is open.

Texas: the combined group

Taxable entities in an affiliated group engaged in a unitary business file one combined group report, and the group is a single taxable entity, including for the no tax due threshold (section 171.1014(a), (b)). An affiliated group is one in which common owners hold a controlling interest, more than 50 percent of the capital, profits or membership interest (section 171.0001(1), (8)); a unitary business is a commonly controlled group whose parts are interdependent and integrated, judged by factors that include a common line of business such as finance and strong centralized management (section 171.0001(17)). A management company and a general partner owned by the same principals and serving the same funds meet both definitions on their face. A passive limited partnership general partner is not a taxable entity and so is not a member; the same vehicle organized as an LLC is, and joins the manager's group, adding its total revenue to the manager's (section 171.1014(c)). The library's Texas passive entity article covers the reporting mechanics.

What the LLC adds depends on the fund. If the fund is a taxable partnership, the LLC subtracts its net distributive income from it (section 171.1011(c)(2)(B)(iii)). That subtraction reaches only income "from a taxable entity," so for a passive fund section 171.1011(e) governs, and it excludes the LLC's share of the passive entity's net income "only to the extent the net income of the passive entity was generated by the margin of any other taxable entity." Interest from borrowers and securities gains are not, so the share stays in total revenue.

Texas: nexus, sourcing and the threshold

Nexus is determined entity by entity (34 Tex. Admin. Code section 3.586(c)). A foreign management company with an office or people in Texas has physical presence (section 3.586(d)(5), (d)(13)); so does a foreign entity "acting as a general partner in a limited partnership that is doing business in Texas," while a limited partner with no other Texas connection does not; and $500,000 or more of Texas gross receipts is economic nexus (section 3.586(d)(12), (f)(1)).

Texas sources a service receipt where it is performed (Tex. Tax Code section 171.103(a)(2)), the reverse of California's benefit rule. Where one charge covers work inside and outside Texas, the Comptroller apportions it by the fair value of the work done in Texas, with hours worked as one measure (34 Tex. Admin. Code section 3.591(e)(26)).

No tax is due if total revenue is at or below $2,650,000 for report years 2026 and 2027, per the Comptroller (section 171.002(d)(2) states $2.47 million before indexing); an entity at or below it files only its Public Information Report or Ownership Report, and a combined group tests the group's total revenue. Above it, the rate is 0.75 percent of taxable margin (section 171.002(a)), or 0.331 percent of apportioned revenue under the EZ computation for total revenue of $20 million or less (section 171.1016).

Texas: registration

A foreign limited partnership and a foreign LLC alike "must register" to transact business in Texas (Tex. Bus. Orgs. Code section 9.001(a)). Section 9.251 excludes listed activities, including internal affairs, owning property "without more," and acting as a governing person of a registered entity; a general partner is a governing person (section 1.002(35)(A)(ii), (37)), so a foreign general partner whose only Texas activity is acting for a registered fund is not transacting business by that alone. An unregistered entity cannot maintain a suit and owes the fees and taxes it would have paid had it registered when first required, with penalties and interest (sections 9.051(b), 9.052(a)); if it transacted business unregistered for more than 90 days, the Secretary of State may also collect a late filing fee equal to the registration fee for each calendar year, a partial year counting in full (section 9.054). The owner protection in section 9.051(c)(3) does not extend to a general partner of a foreign limited partnership (section 9.051(d)). Registration is not the franchise tax test; nexus is.

A worked example

Three principals form an adviser to private credit funds and consider a Delaware limited partnership or a Delaware LLC classified as a partnership for each entity. The facts are invented, and the year is a second year, so the first-year $400 is ignored.

• Management company. $4,000,000 of fees, $1,500,000 of compensation (no individual above the Texas compensation cap), no cost of goods sold. $1,600,000 of the fees is assigned to California (40 percent, taken as given). The principals own all of it.
• General partner. Owned by the same principals, it holds the carried interest in Fund I, a Delaware limited partnership that lends to operating companies and earns interest, so Fund I is passive in Texas (section 171.0003(a)(2)(A), (a)(3)), tested each year. The general partner's share of Fund I's California-assigned total income (from its Schedule K-1 (565) and the Table 3 add-backs) is $2,000,000, and its share of Fund I's net income, a separate net figure, is $1,800,000. It has no other income, fee or guaranteed payment.
• Offices. Variant A: all principals work in California. Variant B: all work in Texas and none in California; the general partner acts for Fund I from Texas, so Fund I is doing business and is registered there.

California, management company. In Variant A it is commercially domiciled in California and is doing business (section 23101(b)(1)). In Variant B its California-assigned fees of $1,600,000 exceed the 2025 sales amount of $757,070 (25 percent of total sales is $1,000,000, and the lesser governs), so it is doing business under subdivision (b)(2) if the indexed figure is near 2025's.

• Limited partnership: $800, due with the return.
• LLC: $800 by April 15, plus the fee on $1,600,000 of California income, in the $1,000,000 to $4,999,999 bracket: $6,000, estimated by June 15. Total $6,800. In Variant B the principals are nonresident members, so the LLC also files their FTB 3832 agreements or pays tax on their shares.

California, general partner.

• Limited partnership: $800 if doing business (commercially domiciled here in Variant A; in either variant, on the FTB's stated position, as general partner of a partnership doing business here, if Fund I is).
• LLC: $800 plus the fee on its $2,000,000 share of Fund I's income, included in full because Fund I is a limited partnership and not an LLC already subject to the fee: $6,000, total $6,800. Had Fund I been an LLC paying its own fee, the amounts already subject to it would be excluded.

Texas, management company (Variant B; in Variant A its Texas receipts are zero). It is taxable in either form and not passive, since fees are not listed passive income. Total revenue of $4,000,000 exceeds the $2,650,000 threshold, and all services are performed in Texas, so apportionment is 100 percent. Margin is the lesser of 70 percent of revenue ($2,800,000), revenue minus $1,000,000 ($3,000,000) and revenue minus compensation ($2,500,000), or $2,500,000, so the tax at 0.75 percent is $18,750. The EZ computation, $4,000,000 times 0.331 percent, gives $13,240, the lower figure, in either form standing alone.

Texas, general partner (Variant B). It has physical presence as a general partner of Fund I, which is doing business in Texas (34 Tex. Admin. Code section 3.586(d)(12)). Because Fund I is registered there, acting as its general partner is not by itself transacting business under section 9.251, though an office of its own in Texas is.

• Limited partnership: its only income is a positive distributive share from Fund I (section 171.0003(a)(2)(B), (a-1)), so it is passive for the year, not a taxable entity and not a group member. The management company reports alone, at $13,240.
• LLC: taxable. Its total revenue is its $1,800,000 share of Fund I's net income: section 171.1011(c)(2)(B)(iii) does not apply because Fund I is passive, and subsection (e) excludes nothing because Fund I's interest was not generated by another taxable entity's margin. Alone it would be under the $2,650,000 threshold, but the principals own more than 50 percent of both entities and the two serve the same funds, so it reports in the management company's combined group, with total revenue of $5,800,000 ($4,000,000 plus $1,800,000). The EZ computation is $5,800,000 times 0.331 percent, or $19,198, before apportionment, taken as 100 percent; how a passive fund's net income is apportioned in a combined group is not stated here. The LLC form adds $5,958 of Texas tax ($19,198 against $13,240) and brings the carry vehicle into the group report.

What the example shows. In California the limited partnership saves the fee and the prepayment at the manager and at the general partner, $6,000 each here, and moving the people to Texas does not remove the California-assigned fees. In Texas the form changes nothing for the manager alone; for the general partner it decides passive status and whether its income lands in the manager's group. The example leaves out the principals' own residency, the funds' own California fee, nonresident withholding and the yearly retest of passive status.

Practice notes

Decide the form entity by entity, since each of the management company, the general partner or carry vehicle, and each fund carries its own California fee, Texas passive and Texas combined group answers. Test doing business in California each year without regard to form or registration, and register a foreign entity with the Secretary of State only if it is transacting intrastate business, since registration alone triggers the $800 until cancellation. For an LLC general partner of a limited partnership fund, carry the fund's Schedule K-1 (565) income items and Table 3 add-backs into the fee computation and pay by the sixth month an estimate that equals or exceeds the prior year's fee; for an LLC with nonresident members, collect each FTB 3832 agreement before filing. Calendar the LLC annual tax (fourth month), the estimated fee (sixth month) and the limited partnership tax (with the return) separately. An entity formed in the last 15 days of a year that does no business owes nothing for it, but the FTB's treatment of the following year should be confirmed before relying on that together with the $400 first-year amount.

In Texas, test a partnership carry vehicle against the 90 and 10 percent limits each year, keep fee and guaranteed payment income out of it, and file the annual report with the passive circle if it is registered; an LLC carry vehicle cannot qualify and reports in the manager's combined group. G&G State Tax Group provides entity-form, doing-business and registration reviews for new investment managers alongside its state and local tax practice.