Skip to main content
NCDOR logo NCDOR

Topical Navigation

  • Home
  • File & Pay
  • Taxes & Forms
    Taxes & Forms
    • Individual Income Tax
    • Sales and Use Tax
    • Withholding Tax
    • Corporate Income & Franchise Tax
    • Motor Carrier Tax (IFTA/IN)
    • Privilege License Tax
    • Motor Fuels Tax
    • Alcoholic Beverages Tax
    • Tobacco Products Tax
    • Partnership Tax
    • Property Tax
    • Collections – Past Due Taxes
    • Business Registration
    • Information for Tax Professionals
    • Policies
    • Order Tax Forms and Instructions
    • Other Taxes And Fees
    • Frequently Asked Questions About Traditional and Web Fill-In Forms
    • IFTA Annual Interest Rates
    • Motor Carrier Seminars
    • Business & Income Tax Seminars
    • Power of Attorney
  • Received a Notice
  • News
    News
    • Notices and Updates
    • Press Releases
    • Reports and Statistics
  • About Us
    About Us
    • Administration and Leadership
    • Careers
    • History of Department
    • DORSAT
    • Public Participation Plan
    • IT Information for Bidders
    • Climate Change & Clean Energy: Plans & Progress
    • Mission and Vision
  • Contact Us
    Contact Us
    • E-Alerts
    • Customer Service Numbers
    • Mailing Addresses
    • Media Requests
    • Office Locations
    • Office of the Taxpayer Advocate
    • Records Requests
    • Report Tax Fraud
    • Request a Speaker for Your Group
    • Request a Service Center Appointment
    • Report Identity Theft
    • Customer Education
  • NC.GOV
  • AGENCIES
  • JOBS
  • SERVICES
GET THE LATEST INFORMATION Most Service Centers are now open to the public for walk-in traffic on a limited schedule. Appointments are recommended and walk-ins are first come, first serve. Walk-ins and appointment information
NCDOR »   Taxes & Forms »   Corporate Income & Franchise Tax »   Directives and Technical Advice Memoranda »   CD-02-2

Directive CD-02-2

Subject: Corporate Members of Limited Liability Companies
Tax: Corporate Franchise Tax
Statutes: G.S. 105-114 and Chapter 327 of the 2001 Session Laws
Issued By: Corporate Income, Excise, and Insurance Tax Division
Date: May 31, 2002
Number: CD-02-2

This directive explains the North Carolina franchise tax liability of a corporate member of a limited liability company (LLC) under G.S. 105-114, as amended by Chapter 327 of the 2001 Session Laws.

Background

North Carolina imposes a franchise tax under G.S. 105-114 on domestic corporations for the privilege of existing as a corporation under North Carolina law and on foreign corporations for the privilege of doing business in North Carolina. The North Carolina Limited Liability Company Act, Chapter 57C of the North Carolina General Statutes, permits the organization of a domestic LLC and the operation of a foreign LLC in the state. An LLC, however, is specifically excluded from the definition of the term "corporation" in G.S. 105-114(b)(2) and is therefore not subject to the general business franchise tax. An LLC is subject to an annual report fee of two hundred dollars ($200.00), and a corporation is subject to an annual report fee of twenty dollars ($20.00).

On August 2, 2001, Governor Easley signed House Bill 1157 into law. That bill, enacted as Chapter 327 of the 2001 Session Laws, amended G.S. 105-114 by adding the following new subsection:

(c) Limited Liability Companies. -- If a corporation is a member of a limited liability company and the limited liability company's governing law provides that seventy percent (70%) or more of its assets, after payments to creditors, must be distributed upon dissolution to the member corporation or to includible corporations of an affiliated group in which the member corporation is includible, then (i) a percentage of the limited liability company's income, assets, liabilities, and equity is attributed to that member corporation and must be included in the member corporation's computation of tax under this Article, and (ii) the member corporation's investment in the limited liability company is not included in the member corporation's computation of tax under this Article. The attributable percentage is equal to the percentage of the limited liability company's assets, after payments to creditors, that would be distributable to the member corporation under the limited liability company's governing law if the limited liability company dissolved as of the last day of the member corporation's taxable year. In all other cases, none of the limited liability company's income, assets, liabilities, or equity is attributable to a member corporation under this Article. A limited liability company's governing law is determined under G.S. 57C-6-05 or G.S. 57C-7-01, as applicable. The definitions in Section 1504 of the Code apply in this subsection.

A taxpayer who, because of fraud with intent to evade tax, underpays the tax under this Article on assets attributable to it under this subsection is guilty of a Class H felony in accordance with General Statute Section 105-236(7).

The law was revised to close an unintended loophole that allowed corporations to reduce or avoid franchise tax. By transferring assets of the corporation into a controlled limited liability company, the corporation reduces or eliminates its investment in tangible property in North Carolina, thereby eroding the franchise tax base. The new law focuses solely on the manner in which a corporation that has nexus in North Carolina and is a member of an LLC is required to compute its franchise tax. It does not alter administrative rule 17 NCAC 5C .0102, the "doing business" rule, or the nexus policy of the Department with respect to an LLC and its members.

This new law became effective January 1, 2002, and applies to taxes due on or after that date. The general business franchise tax is for the income year of the corporation in which the taxes become due. Therefore, the new law is applicable in calculating franchise tax on 2001 corporate franchise and income tax returns that are due on or after January 1, 2002.

Computation of Tax

The computation required under the new law for a corporate member of an LLC varies depending on the LLC's entity classification and the corporate member's other activities in this State. If an LLC with a corporate member is treated as a partnership or is disregarded as an entity separate from its owner for federal income tax purposes, the LLC's income, assets, and activities flow through to the corporate member for purposes of computing the corporate member's income tax and apportioning the corporate member's "Capital Stock, Surplus, and Undivided Profits" franchise tax base under G.S. 105-122(c)(1). Before the law change, the LLC's assets were excluded from the corporate member's "Investment in Tangible Property in NC" franchise tax base.

Under the new law, a percentage of the LLC's assets must be included in the corporate member's "Investment in Tangible Property in NC" franchise tax base if the member is entitled to receive 70% or more of the LLC's assets upon dissolution of the LLC. The percentage of assets the corporate member must include is the percentage of the LLC's assets that would be distributed to the corporate member if the LLC dissolved as of the last day of the corporate member's taxable year. If a corporate member of an LLC must include assets of the LLC in the corporate member's "Investment in Tangible Property in NC" franchise tax base, the corporate member is not required to include its investment in the LLC in its "Capital Stock, Surplus, and Undivided Profits" franchise tax base.

When an LLC with a corporate member is treated as a corporation for federal income tax purposes, the LLC's income, assets, and activities do not flow through to the corporate member. Consequently, the attributes of the LLC do not flow through to the corporate member for purposes of apportioning the corporate member's "Capital Stock, Surplus, and Undivided Profits" franchise tax base under G.S. 105-122(c)(1). Instead, the LLC reports income and franchise tax as a corporate entity.

If a corporate member of an LLC that is treated as a corporation has no connection to this State other than its ownership interest in the LLC, the corporate member does not have a corporate income or franchise tax filing obligation. This applies even if the corporate member is entitled to receive 70% or more of the LLC's assets upon dissolution.

In contrast, if a corporate member of an LLC that is treated as a corporation has activities in this State, in addition to its ownership interest in the LLC, that make the corporate member subject to the franchise tax, the corporate member must file a corporate income and franchise tax return. In this circumstance, the corporate member must include in its "Investment in Tangible Property in NC" franchise tax base a percentage of the LLC's assets if the corporate member is entitled to receive 70% or more of the LLC's assets upon dissolution. The percentage of assets the corporate member must include is the percentage of the LLC's assets that would be distributed to the corporate member if the LLC dissolved as of the last day of the corporate member's taxable year. The corporate member is not required to include its investment in the LLC in its "Capital Stock, Surplus, and Undivided Profits" franchise tax base.

Questions

If you have questions about this directive, you may call the Corporate Tax Division of the North Carolina Department of Revenue at 919-814-1163. You may also write to the Division at P.O. Box 871, Raleigh, N.C., 27602-0871.

 

Directives and Technical Advice Memoranda

  • Corporate Taxes
  • TA-18-1
  • CD-18-1
  • TA-16-1
  • CD-12-01
  • CD-08-2
  • CD-06-1
  • CD-04-2
  • CD-04-1
  • CD-02-3
  • CD-02-2
  • CD-02-1
  • CD-01-1
  • PD-00-3
  • CD-99-1
  • CD-98-4
  • CD-98-3
  • CD-98-2
  • CD-98-1
  • CTAM 97-15
  • CTAM 97-14
  • CTAM 97-13
  • CTAM 97-9
  • CTAM 97-4
  • CTAM 97-3
  • CD-08-1
  • CD-04-2

Share this page:

  • Facebook
  • Twitter
  • Email

How can we make this page better for you?

Back to top

Contact Information

North Carolina Department of Revenue

PO Box 25000
Raleigh, NC 27640-0640
General information: 1-877-252-3052
Individual income tax refund inquiries:
1-877-252-4052

Activity Feed

Tweets by NCDOR

Follow Us

  • Facebook
  • Twitter
  • YouTube
  • EMPLOYEE DIRECTORY
  • Translation Disclaimer
  • Accessibility
  • Terms of Use
  • Privacy Policy
  • Open Budget
NCDOR
https://www.ncdor.gov/taxes-forms/corporate-income-franchise-tax/directives-and-technical-advice-memoranda/directive-cd-02-2