Is the managing member of a Texas LLC doing business in Texas for franchise tax purposes?

Two taxable entities, two nexus questions

Texas does not look through entities. "Taxable entity" means "a partnership, limited liability partnership, corporation, banking corporation, savings and loan association, limited liability company, business trust, professional association, business association, joint venture, joint stock company, holding company, or other legal entity" (Tex. Tax Code section 171.0002(a)). An LLC organized in Texas is taxed because it is "chartered or organized in this state"; an LLC organized elsewhere that owns and leases Texas real estate is taxed because it does business here (section 171.001(a); 34 Tex. Admin. Code section 3.586(d)(15), "holding, acquiring, leasing, or disposing of any property located in Texas"). An LLC can never be a passive entity, because that status is reserved to "a general or limited partnership or a trust, other than a business trust" (section 171.0003(a)(1)). Federal classification is irrelevant: the Comptroller's taxable entities FAQ states that a single-member LLC disregarded for federal purposes still has its own filing responsibility if it has Texas nexus, because responsibility follows legal formation.

The managing member is a different taxable entity. If it is an LLC or partnership organized in another state, it is a "foreign taxable entity," meaning "[a] taxable entity that is not chartered or organized in Texas" (section 3.586(b)), and it is subject to the tax only if it does business in Texas. Nothing in the statute or the rule says that managing a Texas entity is, by itself, doing business here; the analysis runs on the member's own facts.

A worked setting makes the questions concrete. A Delaware LLC taxed as a partnership, organized and run from an office in another state, is the managing member of a Texas LLC that owns a distribution warehouse in Texas and leases it to an unrelated tenant. The managing member holds 10 percent of the Texas LLC; outside investors hold the rest. An unrelated Texas property manager handles the building. The managing member earns an annual asset management fee from the Texas LLC, makes financing and leasing decisions from its own office, and sends no one to Texas. Its share of the Texas LLC's net income is reported on its own Form 1065.

What the nexus rule lists, and where a managing member falls

Section 3.586(d) opens with "[s]ome specific activities that subject a taxable entity to Texas franchise tax include, but are not limited to, the following," and lists 21 activities. Five bear on a managing member.

The partner item is the one practitioners reach for. Item (12) reads: "(A) acting as a general partner in a general partnership that is doing business in Texas; (B) acting as a general partner in a limited partnership that is doing business in Texas (a foreign taxable entity that is a limited partner in a limited partnership does not have physical presence in Texas, if that is the limited partner's only connection with Texas)." The item names general partners and limited partners of partnerships and no one else. The distinction tracks liability: "all partners are jointly and severally liable for all obligations of the partnership" (Tex. Bus. Orgs. Code section 152.304(a)), so a partnership's Texas business is, in law, the general partner's own business. An LLC is built the other way: "a member or manager is not liable for a debt, obligation, or liability of a limited liability company" except as the company agreement provides (Tex. Bus. Orgs. Code section 101.114). The Attorney General opinion usually cited for the general partner rule, Tex. Att'y Gen. Op. No. JM-7 (1983), concluded that a foreign corporation acting as general partner of a Texas general partnership transacting business here is itself transacting business and must register with the Secretary of State; it concerned registration, not tax, and said nothing about limited liability companies. Reading item (12) to cover a managing member extends the item past its words and past the liability rule that explains it.

The holding company item is the closest fit. Item (8) treats as doing business "maintaining a place of business in Texas or managing, directing, and/or performing services in Texas for subsidiaries or investee entities." The Texas LLC is an investee entity, and the managing member manages and directs it. The item's limit is the phrase "in Texas": it reaches management performed in the state, not management of a Texas entity from elsewhere.

The employees item and the place of business item supply the physical presence test. Item (5) is "having employees or representatives in Texas doing the business of the taxable entity," and item (13) is "maintaining a place of business in Texas." A managing member whose personnel inspect the property, meet tenants or lenders, or negotiate leases in Texas has representatives in Texas doing its business. The rule states no frequency and no de minimis amount, so a pattern of visits is weighed on its facts. The Texas property manager's employees are the property manager's, and the Texas LLC's own employees, if it has any, are the LLC's.

The real estate item does not reach an interest in an entity. Item (15) describes the Texas LLC, which holds the warehouse. The managing member holds a membership interest, an intangible, and the rule does not attribute the LLC's real estate to its members. That is the same separate-entity logic that makes the LLC a taxable entity in the first place.

What the Comptroller has said

The accurate statement of the Comptroller's position is that there is none under the current rule. Section 3.586 was amended to add economic nexus for periods ending in 2019 or later, and most recently effective January 7, 2026, to add section 3.586(f)(3); no amendment has touched item (12) or added an LLC item. The Comptroller's franchise tax FAQ on taxable entities addresses family limited partnerships, sole proprietorships, royalty interests, disregarded entities, joint ventures, IRAs as partners, grantor trusts and series LLCs, and nothing on the nexus of a member or manager. No ruling, letter or notice under the margin tax addressing the question was located at the Comptroller's site, and guidance issued under the franchise tax as it stood before 2008 construed rules that no longer exist.

Two provisions leave the Comptroller room. Section 3.586(d) is introduced by "include, but are not limited to," and section 171.001(b) extends the tax "to the limits of the United States Constitution and the federal law adopted under the United States Constitution." Together they permit an assertion that a managing member's control of a Texas business is a sufficient contact even where no listed activity applies. The constitutional question is whether the member's own contacts with Texas, as opposed to the LLC's, satisfy due process and commerce clause nexus; a member that does nothing in Texas and receives distributions from a separately taxed Texas entity has a strong position that they do not, and a member whose management is in substance conducted in Texas has a weak one. The question is open.

The economic nexus test applied to the member

Since the 2019 amendment, physical presence is not required. "For each federal income tax accounting period ending in 2019 or later, a foreign taxable entity has nexus in Texas and is subject to Texas franchise tax, even if it has no physical presence in Texas, if during that federal income tax accounting period, it had gross receipts from business done in Texas of $500,000 or more, as sourced under section 3.591(e) and (f) of this title" (section 3.586(f)(1)). The 2026 amendment adds that the threshold is measured by gross receipts even for an entity that apportions its margin by another method (section 3.586(f)(3)). What counts for a managing member turns on two sourcing rules and one exclusion.

The management fee is a receipt from a service, and Texas sources services to where they are performed. The statute counts receipts from "each service performed in this state" (Tex. Tax Code section 171.103(a)(2)). The Supreme Court of Texas held that a service is performed in Texas where the labor is done, and, where technology performs the useful act, where the equipment is located (Sirius XM Radio, Inc. v. Hegar, No. 20-0462 (Tex. March 25, 2022)), and the rule now reads that "a service is performed at the location or locations where the taxable entity's personnel or property are doing the work" the customer hired it to perform (section 3.591(e)(26)(A)). A fee for asset management performed at an out-of-state office is not a Texas receipt, whatever the location of the asset managed. A fee for work done by personnel in Texas is.

The member's share of the Texas LLC's income is excluded. A partnership's total revenue starts from Form 1065 lines, including "the amounts reportable as income on lines 4, 6, and 7" (section 171.1011(c)(2)(A)(ii)), and line 4 is ordinary income from other partnerships. The statute then subtracts "net distributive income from a taxable entity treated as a partnership or as an S corporation" for federal purposes (section 171.1011(c)(2)(B)(iii)). A multi-member Texas LLC is a taxable entity and never a passive entity, so a managing member's distributive share from it comes out of the member's total revenue, and the exclusion carries into apportionment: "receipts excluded from total revenue by a taxable entity under Section 171.1011 may not be included in either the receipts of the taxable entity from its business done in this state ... or the receipts of the taxable entity from its entire business done" (section 171.1055(a)). Section 3.586(f)(1) measures the $500,000 test by receipts "as sourced under section 3.591," and section 3.591(b)(3) defines gross receipts as revenue determined under the total revenue rule, so on the rule's own cross-references the excluded distributive share does not count toward the member's threshold. One caution: section 3.586(f)(2) describes gross receipts for the economic nexus test as "all revenue reportable by a taxable entity on its federal return, without deduction for the cost of property sold, materials used, labor performed, or other costs incurred." That sentence addresses deductions for costs, not statutory exclusions, and the better reading leaves the exclusion in place; the Comptroller has not addressed the interaction in a published pronouncement. The exclusion applies only where the lower tier is itself a taxable entity: income from a passive entity stays in total revenue and is sourced to the passive entity's principal place of business (section 3.591(e)(20)), and a tiered partnership election can move a lower tier's total revenue up to the member (section 171.1011(c)(2)(A)(vi)). The library's article on Texas passive entities and tiered partnerships covers that ground.

The date matters as much as the amount. The economic nexus rule applies only to accounting periods ending in 2019 or later, and the beginning date rule follows it: on or after January 1, 2019, a foreign taxable entity begins doing business in Texas on the earliest of the date of physical presence, the date it obtains a Texas use tax permit, or "the first day of the federal income tax accounting period ending in 2019 or later in which the entity had gross receipts from business done in Texas of $500,000 or more" (section 3.586(g)(2)); before 2019, the date of physical presence controls. A questionnaire answer that the member's Texas receipts have exceeded $500,000 since a year before 2019 establishes nothing for the years before 2019, when only physical presence created nexus, and it can set a beginning date years earlier than the law supports. The accurate answer gives the first period ending in 2019 or later in which the threshold was met, or states that it never was.

What the answer changes on the franchise tax report

The nexus conclusion plays out differently depending on the member's ownership percentage, because Texas combined reporting turns on control.

Where the member holds half or less and has no nexus, nothing changes for the member. The Texas LLC files its own franchise tax report and its own Public Information Report, which lists each entity in which it owns 10 percent or more, each entity that owns 10 percent or more of it, and the names and addresses of its officers and directors, or, for a limited partnership, its general partners (Tex. Tax Code section 171.203(a)(1) to (3)). A managing member holding 10 percent appears on the Texas LLC's report either way; that disclosure is not an admission of the member's nexus. The member files nothing in Texas.

Where the member holds half or less and has nexus, it becomes a Texas filer in its own right. The Comptroller establishes the account through the Texas Nexus Questionnaire, Form AP-114, filed online under its own Webfile number, and the beginning date follows section 3.586(g). The member's total revenue excludes its distributive share from the Texas LLC, so for many management vehicles the remaining revenue (management fees, interest, other income) falls at or below the no tax due threshold, $2,650,000 for report years 2026 and 2027 under the Comptroller's current schedule (section 171.002(d)(2); section 171.006). The Comptroller "discontinued the No Tax Due Report for the 2024 report year and later," and an entity at or below the threshold files no annual franchise tax report but "is required to file" a Public Information Report (Form 05-102) or Ownership Information Report (Form 05-167) each year. The Comptroller's filing requirements page assigns the PIR to corporations, LLCs, limited partnerships, professional associations and financial institutions that are organized in Texas or have nexus in Texas, and the OIR to other taxable entities, so a member that is an LLC or a limited partnership files the PIR and a general partnership or trust files the OIR. The member's own report then lists the Texas LLC as an entity in which it holds 10 percent or more. Failure to file the information report alone can lead to forfeiture of the right to transact business and to personal liability of the entity's directors and officers for certain entity debts, consequences the library's article on Texas franchise tax nexus without a Texas footprint describes.

Where the member holds more than half, the combined group rules take over and the nexus answer changes its role. "Taxable entities that are part of an affiliated group engaged in a unitary business shall file a combined group report" (section 171.1014(a)); an affiliated group is one "in which a controlling interest is owned by a common owner or owners, either corporate or noncorporate, or by one or more of the member entities" (section 171.0001(1)); for an LLC a controlling interest is "more than 50 percent, owned directly or indirectly, of the total membership interest" (section 171.0001(8)(C)); and "[a]ll affiliated entities are presumed to be engaged in a unitary business" (section 3.590(b)(6)(B)). A managing member holding 60 percent of the Texas LLC is in a combined group with it whether or not the member has nexus, because "[a] combined group must include eligible entities even if those entities do not have nexus" (section 3.590(b)(2)(C)). What the member's nexus decides is the numerator. The group's Texas receipts include "the gross receipts of each taxable entity that is a member of the combined group and that has a nexus with this state" (section 171.103(b)), and "gross receipts from business done in this state of taxable entities without nexus individually in Texas are excluded from the numerator" (section 3.590(d)(5)(B)) while remaining in the denominator. A member without nexus contributes its revenue, its cost of goods sold or compensation, and its denominator receipts to the combined report, and none of its Texas receipts. Receipts from transactions between members of the group, a management fee among them, are excluded from both apportionment figures (section 171.1055(b), (c), referring to section 171.1014(c)(3)). Each member that is organized in Texas or has nexus files its own PIR or OIR; a member without nexus files none.

One reporting choice concedes the answer. Where the Texas LLC is a single-member entity disregarded for federal purposes, its parent may report the LLC's revenue, cost of goods sold, compensation and gross receipts with its own, and "in that event, both entities are presumed to have nexus" (section 3.590(d)(6)). A foreign parent that blends a disregarded Texas LLC into its own report has presumed its own nexus by the method it chose. Listing the Texas LLC as its own member of the combined group, rather than including its figures with the parent's, preserves the question.

Registration with the Secretary of State is a separate question

Whether the managing member must register as a foreign entity is governed by the Business Organizations Code, not the Tax Code, and the two answers can differ. The code lists activities that do not constitute transacting business, including "owning, without more, real or personal property in this state" and "acting as a governing person of a domestic or foreign entity that is registered to transact business in this state" (Tex. Bus. Orgs. Code section 9.251(15), (16)). A governing person serves as part of the governing authority, which includes "the general partners of a general partnership or limited partnership," "the managers of a limited liability company that is managed by managers," and "the members of a limited liability company that is managed by members who are entitled to manage the company" (section 1.002(35)(A)(ii) to (iv), (37)). On that text, serving as the managing member of a Texas LLC is, by itself, not transacting business for registration purposes. The Secretary of State's instructions for registering a foreign limited partnership nonetheless state that a foreign entity serving as a general partner in a partnership transacting business in Texas is itself transacting business, citing JM-7, and its FAQ says the office "cannot give a legal opinion as to whether a particular foreign entity is" transacting business. A managing member resolves the registration question on the code's text and its own activities, and infers no franchise tax conclusion from registration or its absence.

Practice notes

The sound sequence for a managing member organized outside Texas starts with its own activity, not its title: where its personnel work, where its management decisions are made and carried out, whether anyone goes to Texas on its behalf and how often, and whether it keeps an office or a use tax permit in the state. The second step is its own receipts, period by period from 2019, with management fees sourced to where the work is done and the distributive share from the Texas LLC excluded when the LLC is a taxable entity. The third step is control: at more than 50 percent, the member is in a combined group regardless of nexus, and the question becomes whether its receipts belong in the numerator. A nexus questionnaire is answered from those facts, with the member's capacity stated as it is, managing member of a Texas limited liability company rather than general partner of a partnership, and with the beginning date tied to the first period ending in 2019 or later in which the threshold was met or to the first date of physical presence, never to a year the economic nexus rule did not reach. A member that files its own report keeps its information report current in years with no tax due, because forfeiture does not depend on a tax liability. Where the Comptroller asserts nexus on status alone, the response is the text of section 3.586(d)(12), the member's absence from it, and the liability rule that explains the general partner item. G&G State Tax Group provides Texas franchise tax nexus analysis, nexus questionnaire responses and combined group membership reviews for managers and investors in Texas entities alongside its state and local tax practice.