Does a single-member LLC with no receipts owe Los Angeles business tax registration, and how is the account closed?

Who must register: person, business and engaged in business

Three definitions in section 21.00 answer the registration question, and they are read in sequence.

The first is "person." Section 21.00(d) defines it as "any individual, receiver, administrator, executor, assignee, trustee in bankruptcy, trust, estate, firm, partnership, joint venture, club, company, joint stock company, business trust, domestic or foreign corporation, association, syndicate, society, or any group of individuals acting as a unit, whether mutual, cooperative, fraternal, nonprofit or otherwise." The list does not name a limited liability company, but "company" and "any group of individuals acting as a unit" are broad enough that the Office of Finance's Tax Information Booklet describes the term as reaching individuals, businesses, legal entities and other organizations. The ordinance contains no rule that follows the federal check-the-box result. A single-member LLC that is disregarded for income tax purposes is still an entity under state law, and the City's question is whether that entity is engaged in business, not whose income tax return reports its income.

The second is "business." Section 21.00(h) defines it as "any activity, enterprise, profession, trade or undertaking of any nature conducted or engaged in, or ordinarily conducted or engaged in, with the object of gain, benefit or advantage, whether direct or indirect, to the taxpayer or to another or others." The same subdivision adds two sentences that matter for holding entities. It includes "operations of subsidiary or independent entities conducted for the benefit of others and at no profit to themselves," so an entity that exists to serve an affiliate does not escape by earning nothing. And it provides that "[a] person shall not be deemed to be engaged in business solely by reason of receipt of dividend or interest income from passive investments."

The third is "engaged in business." Section 21.00(i) defines it as "the conducting, operating, managing or carrying on of a business, whether done as owner, or by means of an officer, agent, manager, or employee," and deems a person engaged in business within the City if the person or its employee maintains a fixed place of business in the City, owns or leases City real property for business purposes, regularly keeps inventory in the City for sale, regularly solicits business in the City, performs work or services in the City on at least seven working days a year, or uses City streets to operate motor vehicles for business. The list "shall not be a limitation on the meaning of engaged in business."

Where those definitions place a registration obligation, section 21.03(a) imposes it: "No person shall engage in any business or occupation subject to tax under the provisions of this Article without obtaining a registration certificate and paying the tax required." Section 21.06(a) then requires a separate certificate for each classification of business at each City location, and a single certificate per classification for activity carried on from outside the City.

When an LLC with no receipts is in business, and when it is not

The passive investment sentence in section 21.00(h) is narrow, and its limits decide most cases.

It names "dividend or interest income from passive investments" and nothing else. An LLC that holds a brokerage account, receives dividends and interest, and does nothing more fits it. The ordinance does not say whether gains from selling securities, distributive shares of partnership income, or receipts from managing investments for others fall within the exclusion, and no Office of Finance rule, City Clerk's ruling or published answer on holding companies was found. The definition of gross receipts, which speaks of "the total amount charged or received for all sales and commissions for the performance of any act, service or employment of whatever nature" (section 21.00(a)), is built around sales and services rather than investment returns, so those receipts present an open question rather than a settled one. The Office of Finance's own published answer to the question "What does the City of Los Angeles consider to be a business?" quotes section 21.00(h) and closes by inviting the reader to contact the Office "to discuss the specific applicability of the above definition."

The exclusion also tests activity, not receipts. A statement that an LLC has no receipts and no payroll does not answer the definition. An LLC with no receipts in a year can still be engaged in business if it owns or leases City real property for business purposes (a building held for lease, even between tenants, is the common case), maintains a fixed place of business in the City, or carries on management activity "for the benefit of others and at no profit to themselves." Conversely, an LLC with receipts can be outside the definition if its only receipts are passive dividends and interest.

The ordinance also excludes receipts from related entities from gross receipts, which changes the measure of the tax but not the registration question. Section 21.00(a)(5) excludes "[a]ny amount received from or charged to any person which is a related entity to the tax-payer," meaning entities with 80 percent or more common ownership by value and voting power, unless the amount is compensation for activities performed for unrelated persons. An LLC that charges management fees only to commonly owned affiliates can be engaged in business and still report small or zero taxable receipts.

Where an LLC is engaged in business, its classification determines the rate. The ordinance sorts businesses into gross receipts fund classes (sections 21.41 to 21.49), and it classifies the rental of office and commercial buildings and the rental of accommodations or residences in section 21.43. Section 21.49(c) is the residual class for any "trade, calling, occupation, vocation, profession or other means of livelihood, as an independent contractor and not as an employee of another, and not specifically taxed by other provisions of this article." Its predecessor, section 21.190, was repealed effective January 9, 2007, so older guidance citing 21.190 refers to what is now 21.49(c).

The small business exemption and the timely renewal

Most registered entities with little or no activity owe nothing, but only by following the renewal mechanics.

Section 21.29(a) provides that "[n]o tax is required to be paid under this Article by any Small Business," defined as a person "whose total taxable and nontaxable gross receipts from within and without the City do not exceed" $100,000, the figure in effect since July 1, 2006. The test counts receipts everywhere, not only City receipts, and counts nontaxable receipts as well as taxable ones.

The exemption is claimed by filing. Section 21.29(c) requires an exempt person "to timely file for registration and subsequent renewals before the delinquency date," and provides that failing to do so "shall render inapplicable the exemption" and "subject the person to the tax that would otherwise be payable and to any interest and penalty applicable thereto." Annual business taxes are due January 1 and are delinquent if not paid by the last day of the following month (sections 21.04(a), 21.05(a)(1)); the Office of Finance describes the renewal as due January 1 and delinquent on the first business day of March. Its registration FAQ adds that the exemption "is provided only for current registered businesses," so an entity that was engaged in business but never registered does not reach back to claim it for unregistered years.

The consequence for an open account is direct. An LLC that registered at some point, then stopped filing renewals because it believed it had nothing to report, has no exemption for the unfiled years under the text of section 21.29(c). Penalties on late tax start at 5 percent and build monthly to a cumulative 40 percent after the fourth month (section 21.05(b)), with interest at a rate tied to the federal short-term rate plus three points (section 21.05(e)).

What an open account produces when nothing is filed

An open account generates renewal obligations every year until it is closed, whether or not the entity is active.

When no statement is filed, the City can assess on estimates. Section 21.16(a)(2) allows a notice of assessment for tax "known by the Director of Finance to be due or estimated by the Director of Finance, after full consideration of all information within the Director's knowledge concerning the business and activities of the person assessed." Section 21.15(c) allows an estimated assessment against a person that refuses, after written demand, to make its books and records available. The person assessed has 45 days after service to request a hearing before an Assessment Review Officer or a waiver of hearing; otherwise the assessment becomes final and immediately due (section 21.16(b)). Section 21.16(g) lets the Director of Finance establish a Board of Review to hear appeals from the Assessment Review Officer.

The ordinance's limitations periods depend on what was filed. When a registration or renewal is filed on time, an assessment must be made within three years of the date the tax was due, or six years where the understatement is 25 percent or more of the tax reported (section 21.16(a)(1)(A), (B)). When a registration or renewal is filed late, the period is three years from the date the late form was filed (section 21.16(a)(1)(C)). Willful evasion has no limit (section 21.16(a)(1)(D)), and "all other circumstances" are governed by the time "otherwise allowed by law" (section 21.16(a)(1)(E)). The Office of Finance tells unregistered businesses that "there is a business tax liability for each of the prior eight calendar years of operation within the City, but none for calendar years when the business was not operated," and that the City may seek tax, interest and penalties "for the current tax year and the prior seven tax years." The eight-year figure is the ordinance's: a person that fails to obtain a registration certificate is liable from the date it became subject to the tax, "but in no event shall such person be liable for a period greater than eight (8) years" (section 21.19(a)).

Those periods also explain how dormant accounts come to light. The City sends letters based on information from the Franchise Tax Board, and Rev. and Tax. Code section 19551.1 lets the FTB share a taxpayer's name, address, identification number and business activity code with a city tax official under a reciprocal agreement. An LLC that files California returns from a City address can generate a letter even if it has never had a City customer.

Closing the account

Closing an account is a filing that starts its own deadlines.

The Office of Finance's procedure is short: a business that sells, closes or discontinues operations in the City "must cancel" its registration certificate "by sending a letter or by completing a Taxpayer Information Update Form" and sending it to the Office of Finance. The ordinance adds the consequences. When a business "discontinues, dissolves, or otherwise terminates before the expiration of a business tax period, any taxes accrued and owing" become "due on the date of termination" (section 21.04(e)), and they are delinquent if not paid "within 45 days of the termination of the business" (section 21.05(a)(5)). After a person discontinues, "a deficiency determination may be made at any time within three years thereafter as to any liability arising from engaging in such business" (section 21.15(i)).

Two points follow for an LLC that asks to close because it has no receipts. First, closure does not cure the open years. If renewals were not filed for years while the account was open, the City can ask for them before treating the account as closed, and section 21.29(c) means the exemption does not attach to those years automatically. Second, the basis for the request matters. An LLC that was engaged in business and has stopped is discontinuing; an LLC that was never engaged in business because its only income was passive dividends and interest is asking the City to accept that the account should not have existed. The ordinance treats those differently, and the request is easier to act on when it states which it is, the date any activity ended, and the facts that place the entity inside or outside section 21.00(h).

The ordinance gives the Office of Finance broad enforcement powers over any account. The Director of Finance's deputies "shall inspect and examine all places of business in the City" (section 21.15(b)), may audit the books and records "of any person engaged in business in the City" (section 21.15(c)), and may "require the person subject to the tax to provide any other information including a list of subcontractors, vendors and tenants that will help enforce the business tax" (section 21.14(d)). An answer to any such request is a statement to the City about each person it names.

The answer also bears on the voluntary disclosure program. Section 21.16.1 lets the Director of Finance limit an unregistered taxpayer's lookback to five years, and relieve penalties (not interest) for reasonable cause, but only for a taxpayer that "has not been previously contacted by the City or by a City contractor regarding its tax liabilities" and is not under audit (section 21.16.1(a)(4)). Whether a City request to one person for information about others, such as a list of vendors or tenants under section 21.14(d), is a contact with each person named is not answered by the ordinance or by any published Office of Finance guidance found.

The state side runs separately. A California LLC's annual tax and its Form 568 filings continue until the entity is cancelled with the Secretary of State, a subject the library treats in its article on short period Form 568 filings; closing a City account does not end them, and cancelling the entity does not close the City account. The library's articles on San Francisco's gross receipts apportionment for financial services and on Portland's stack of local business taxes cover how two other cities measure the tax once a business is inside it.

Practice notes

The first question for any LLC that receives a City notice is what the entity does, not what it earned: whether it owns or leases City real property for business purposes, maintains a fixed place of business in the City, provides services or management for affiliates or others, or only receives passive dividends and interest. Where the facts fit section 21.00(h), the sound response explains that the entity has no business activity in the City and asks that the account be cancelled as one that should not have been opened. Where the entity was engaged in business, the sound sequence is to file any unfiled renewals for the open years (with taxable and nontaxable gross receipts counted everywhere for the $100,000 test), then cancel by letter or Taxpayer Information Update Form with the termination date stated, pay any accrued tax within 45 days, and keep the records for at least three years after discontinuance. Before answering an Office of Finance request for information that names other persons, a careful taxpayer knows each named person's registration status, because the answer may bear on that person's access to the voluntary disclosure terms of section 21.16.1. A request for a hearing on any assessment is due within 45 days of service. G&G State Tax Group provides Los Angeles business tax registration reviews, account closure and Office of Finance assessment representation alongside its state and local tax practice.