What happened to Texas franchise-tax filings, loss carryovers, nexus, and income computation when a Texas corporation converted to a single-member LLC?

Plain-English summary

The conversion required no final franchise-tax report, preserved the corporation's business-loss carryover, and left the Texas-organized single-member LLC taxable as a separate entity despite federal disregarded treatment.

Company B, a Texas corporation with a franchise-tax business-loss carryover, planned to convert under Section 32, Part Five of the Texas Business Corporation Act into a single-member LLC owned by Company A. The LLC would be disregarded federally.

The Comptroller answered five requests:

1. No final franchise-tax report was required from the pre-conversion corporation. The final sales-tax-return question was referred to Sales Tax Policy and not answered.
2. The business-loss carryover survived and remained available on the post-conversion LLC's future franchise-tax reports.
3. The parent did not gain nexus solely from ownership of the Texas-operating disregarded LLC.
4. The LLC remained taxable because it was organized in Texas, regardless of federal disregarded status.
5. The LLC computed reportable federal taxable income as a separate corporation for Texas franchise-tax purposes, even though federal law treated it as a division of its corporate owner.

Currency note: This is a pre-2008 franchise-tax and historical conversion analysis. Confirm current Texas entity-conversion, margin-tax, and filing rules.

What this means for you

Corporations converting to single-member LLCs

Federal disregarded treatment did not erase the Texas entity or its tax obligations. On these facts, continuity also preserved the Texas business-loss carryover.

Corporate parents

Mere ownership of the post-conversion LLC did not create parent-level nexus, but the LLC itself remained taxable in Texas.

Common questions

Q: Was a final franchise-tax report required?
A: No.

Q: Did the business-loss carryover disappear?
A: No. It remained available to the converted LLC.

Q: Was the disregarded LLC taxable in Texas?
A: Yes, because it was organized in Texas.

Q: Did the letter decide the final sales-tax return?
A: No. That issue was referred to Sales Tax Policy.

Citations and references

• Texas Business Corporation Act, Part Five, Sec. 32

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9910776L

Original ruling text

October 5, 1999

Dear **:

In your letter of September 21, you requested rulings regarding the franchise
tax treatment of a corporation which converts to a single member LLC (SMLLC).

You indicate that Company A is the parent corporation of several subsidiaries
including Company B, a Texas corporation whose commercial domicile is in Texas.
Company B has a business loss carryover for franchise tax purposes. Company B
plans to convert to a SMLLC pursuant to Section 32, Part Five of the Texas
Business Corporation Act. Company B will subsequently be treated as a
disregarded entity for federal income tax purposes.

I have restated each of the rulings you requested followed by a response.

1. The pre-conversion Company B will not need to file a final Texas franchise
   tax report or a final sales tax return.

Response:

Company B will not need to file a final franchise tax report. I have referred
the question regarding the sales tax return to our Sales Tax Policy section.

2. The Texas business loss carryover of the pre-conversion Company B will be
   available for use on the future Texas franchise tax reports of the
   post-conversion SMLLC.

Response:

Correct.

3. The corporate parent of the pre-conversion corporation will not become
   subject to Texas franchise tax solely because it is a single member owner of
   the post-conversion SMLLC which is doing business in Texas, even though SMLLC
   is disregarded for federal income tax purposes.

Response:

Correct.

4. The post-conversion single member SMLLC will be subject to Texas franchise
   tax based on being qualified to do business in Texas or actually doing business
   in Texas despite its' being disregarded for federal income tax purposes.

Response:

The SMLLC is subject to franchise tax because it is organized in Texas even if
the entity is disregarded for federal income tax purposes.

5. The post-conversion single member SMLLC will compute its reportable federal
   taxable income for Texas franchise tax purposes as though it were a separate
   corporation, despite its' being treated for federal income tax purposes as a
   division of its corporate member.

Response:

Correct.

This response is based on the facts presented and current law. If there are
different or additional facts, the response may change.

If you have any questions, contact Tax Policy Division. You may call toll free
1-800-531-5441, or our regular number is 512/463-4600. My extension is 3-4662.

Sincerely,

Bob Jeffcoat
Tax Policy Division