How to Mitigate California Foreign Entity Withholding

In this episode of Coffee with Carl, attorney Carl Zoellner breaks down California’s foreign entity withholding and potential entity structures to mitigate its effect.

Updated November 24, 2020

Two concerns for many investors and business owners who do business in the state of California are its franchise LLC fee and its annual franchise fee. Although these may sound like the same thing, these are actually two different costs just to do business in the state of California.

To combat the extent of these two franchise fees, limited partnerships (LPs) are being used more frequently in California, especially with flippers who focus on high-end markets.

On top of all this, California has additional taxation for foreign entities, so that’s another concern when doing business there. Note that, “foreign” in this context does not refer to out-of-country, but rather, out-of-state entities.

Oftentimes, when I suggest using an LP in California, clients want to use their Wyoming holding companies to serve as one of the partners in that partnership. The issue with this is that, when California sees a foreign partner in a California business, there are additional tax withholdings to contend with.

Commonly, when we suggest using a local (California) limited partnership to do business in California (perhaps for a high-end flip), both partners are California entities. This mitigates the concern of additional withholding for foreign(out-of-state) entities as well as other Franchise Tax Board issues.

The Takeaway

If you currently do business or plan to do business in California, I highly recommend scheduling your complimentary Strategy Session today. On the call, you and a Senior Advisor will go over your current entity structure and make recommendations or adjustments to enhance your asset protection and tax planning. You can schedule online or by calling 888.871.8535.


Watch as Carl explains foreign entity withholding in the state of California and how to use limited partnerships to mitigate these additional taxes and fees.


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