PS 92(12.1)

Limited Liability Companies

BACKGROUND: On October 27, 1992, the Department issued PS 92(12), Limited Liability Companies. Combining the corporation law characteristic of limited liability for all investors with the possibility of the federal tax law treatment of partnerships, limited liability companies could not at that writing be organized under Connecticut law. Nonetheless, PS 92(12) set out the treatment of limited liability companies for corporation business tax purposes and for income tax purposes.

Since the issuance of PS 92(12), the Connecticut General Assembly has passed the Connecticut Limited Liability Company Act, 1993 Conn. Pub. Acts. 267 (codified as Conn. Gen. Stat. §§34-100 to 34-242) [hereinafter referred to as "the Connecticut Act"], authorizing the creation of limited liability companies under Connecticut law and, under prescribed conditions, the transaction of business in Connecticut by foreign limited liability companies. (In fact, as of this writing, only a handful of States have not enacted legislation allowing the organization of limited liability companies.)

Also, the Internal Revenue Service has issued a number of rulings holding that limited liability companies that are organized under various State laws will be treated as partnerships for federal income tax purposes. Some of those rulings involve "bullet-proof" State statutes containing restrictive provisions that, effectively, will automatically qualify all limited liability companies that are organized thereunder as partnerships. See, e.g., Rev. Rul. 93-30, 1993-1 C.B. 231 and Rev. Rul. 93-50, 1993-2 C.B. 310 (analyzing Nevada and West Virginia limited liability company statutes, respectively).

Other rulings involve "flexible" State statutes. A limited liability company that is organized under a "flexible" State statute, like the Connecticut Act, "may be classified as a partnership or may be classified as an association taxable as a corporation, depending upon the provisions adopted in the LLC's articles of organization or operating agreement." Rev. Rul 94-79, 1994-51 I.R.B. 7 (analyzing the Connecticut Act). See, e.g., Rev. Rul. 93-38, 1993-1 C.B. 233 and Rev. Rul. 94-30, 1994-1 C.B. 316 (analyzing Delaware and Kansas limited liability company statutes, respectively).

PURPOSE: The purpose of this Policy Statement is to describe how limited liability companies, including those that are organized under the Connecticut Act, will be treated both for corporation business tax purposes and for income tax purposes.

EFFECTIVE DATE: Effective upon issuance and applicable, for corporation business tax purposes, to all income years, and, for income tax purposes, to all taxable years beginning on or after January 1, 1994.

STATUTORY AND REGULATORY AUTHORITY: Conn. Gen. Stat. §§12-213, 12-214, 12-701(b) and 33-113; Conn. Agencies Regs. §§12-213-1 and 12-701(b)-1(3) and (4).

TREATMENT FOR CORPORATION BUSINESS TAX PURPOSES: Conn. Gen. Stat. §12-214 imposes the corporation business tax on every company that carries on, or has the right to carry on, business in Connecticut for the privilege of carrying on or doing business within the state in a corporate capacity or as an unincorporated association taxable as a corporation for federal income tax purposes.

Conn. Gen. Stat. §12-213 defines company as including "any corporation ... or association ...."

Conn. Agencies Regs. §12-213-1(e) defines association or association taxable as a corporation for federal income tax purposes as "an unincorporated organization that has ... as described in section 301.7701-2(a) of title 26 of the Code of Federal Regulations, more corporate characteristics than noncorporate characteristics."

Furthermore, Conn. Gen. Stat. §33-113 provides:

A limited liability company formed under sections 34-100 to 34-242, inclusive, or a foreign limited liability company transacting business in this state pursuant to the provisions of said sections shall be treated, for purposes of taxes imposed by the laws of the state or any political subdivision thereof, in accordance with the classification under 26 C.F.R. Section 301.7701-2.

As this Policy Statement indicates, the Internal Revenue Service has issued a number of Revenue Rulings on the status of limited liability companies that are formed under the laws of various States.

To the extent that a limited liability company is organized under a "bullet-proof" State statute, the limited liability company will be classified as a partnership for corporation business tax purposes.

To the extent that a limited liability company is organized under a "flexible" State statute, such as the Connecticut Act, the limited liability company may be classified as a partnership or may be classified as an association taxable as a corporation, depending upon the provisions adopted in its articles of organization or operating agreement. Whether a limited liability company that is organized under the Connecticut Act (or the law of another State according similar flexibility) will be classified as a partnership, or as an association, depends on whether it has, as described in 26 C.F.R. §301.7701-2(a), more corporate characteristics than noncorporate characteristics. (A limited liability company can request a ruling on whether it is classified as a partnership by following the requirements set out in Rev. Proc. 95-10, 1995-3 I.R.B. 1.)

TREATMENT FOR INCOME TAX PURPOSES: Conn. Gen. Stat. §12-701(b) provides that "[a]ny term used in [chapter 229, Income Tax] shall have the same meaning as when used in a comparable context in the laws of the United States relating to income taxes unless a different meaning is clearly required. Any reference in this chapter to the laws of the United States shall mean the provisions of the Internal Revenue Code ...."

Temporary Income Tax Rule 52(b)-1(3) and (4), which was in effect for taxable years commencing in 1991, 1992 or 1993, defined partnership as meaning "a partnership as defined in 26 U.S.C. §7701(a)(2) and 26 C.F.R. §301.7701-3(a)", and partner as meaning "a partner as defined in 26 U.S.C. §7701(a)(2) and 26 C.F.R. §301.7701-3(d)." PS 92(12) provided that, because this Temporary Income Tax Rule "incorporate[d] by reference the criteria under the Treasury Regulations for determining whether an entity is a partnership for federal income tax purposes, the Department [would] follow the application of those criteria by the Internal Revenue Service in revenue rulings such as Rev. Rul. 88-76, 1988-2 C.B. 360."

Conn. Agencies Regs. §12-701(b)-1(3) defines partnership as meaning "a partnership as defined in section 7701(a)(2) of the Internal Revenue Code and 26 C.F.R. §301.7701-3(a) and includes a limited liability company that is treated as a partnership for federal income tax purposes."

Conn. Agencies Regs. §12-701(b)-1(4) defines partner as meaning "a partner as defined in section 7701(a)(2) of the Internal Revenue Code and 26 C.F.R. §301.7701-3(d) and includes a member of a limited liability company that is treated as a partnership for federal income tax purposes."

This regulation is in effect for taxable years commencing during or after 1994. Because Conn. Gen. Stat. §12-701(b) and Conn. Agencies Regs. §12-701(b)-1(3) and (4) incorporate by reference the criteria under the Treasury Regulations for determining whether an entity is a partnership for federal income tax purposes, the Department will follow the application of those criteria by the Internal Revenue Service. A limited liability company that is so classified as a partnership, and not as an association taxable as a corporation, will be required to file a Form CT-1065, Connecticut Partnership Income Tax Return, where it has income, gain, loss or deduction derived from or connected with sources within Connecticut. Conn. Gen. Stat. §12-726(a) and Conn. Agencies Regs. §12-726(a)-1.

In accordance with Conn. Gen. Stat. §§12-712, 12-715 and 12-716, and Part VII of the Connecticut Income Tax Regulations, nonresident individuals who are members of a limited liability company are subject to Connecticut income tax on their share of the limited liability company's income derived from or connected with Connecticut sources in the same manner that nonresident individuals who are partners of a partnership are subject to Connecticut income tax on their share of the partnership's income derived from or connected with Connecticut sources.

EFFECT OF THIS DOCUMENT: A Policy Statement is a document that explains in depth a current Department policy or practice affecting the liability of taxpayers. Unlike a Ruling, a Policy Statement does not apply a policy or practice to a specific set of facts but it may be referred to for general guidance by taxpayers. Unlike a Special Notice, it does not announce a new policy or practice in response to changes in state or federal laws or regulations or to judicial decisions.

EFFECT ON OTHER DOCUMENTS: PS 92(12) is modified and superseded. 

PS 92(12.1)
Corporation business tax
Income tax
Issued: 6/8/95
Replaces PS 92(12) issued 10/27/92