California imposes a minimum franchise tax on all business entities in the state. Find out who must pay the tax and how you can avoid being double billed if you are forming a business near the end of the year. Show
If you are starting a business in California you may be surprised to learn that California business entities must pay a minimum franchise tax to the state each year – even if the business is inactive or loses money. At $800, the annual tax fee can feel like a lot of money to a cash-strapped startup. Fortunately, there are ways to minimize the tax if you are starting a business during the last months of the year. Who Must Pay the California Tax Franchise Fee?California business entities must pay the $800 minimum franchise tax each year, even if they don’t conduct any business or operate at a loss. Types of businesses that must pay the minimum tax include:
The $800 tax is a minimum. Profitable business entities may pay additional corporate taxes or an LLC fee based on the amount of profits. When are the LLC Fees and Corporation Fees Due?The first year’s franchise tax fee is due no later than the fifteenth day of the fourth month after the business entity was formed. After that, the annual fee must be paid by April 15th. Thus, if you formed an LLC on June 1st, the first annual fee would be due on October 15th, and the second year’s fee would be due on April 15th of the following year. But the first and second year’s fees can come due at about the same time for a business entity formed near the end of the year. Suppose you form an LLC on November 15th. You’ll still be responsible for the full $800 first-year fee – the Franchise Tax Board does not reduce or pro-rate the fee for businesses formed in the last half of the year. To make matters worse, your first year’s fee will be due on March 30th of the following year, but you’ll have to pay the second year’s fee just over two weeks later, on April 15th. That’s a $1600 tax bill in your first few months of business. This double billing can mean that the cost to start a business in California is more than you budgeted for. How to Avoid Double Billing of the Franchise Tax FeeThe CA Franchise Tax Board does not charge a first-year fee for new businesses formed in the last 15 days of the year. Therefore, a business formed at the end of December will only be responsible for one $800 payment in April. A business formed at the beginning of the new year will also only be billed for one year’s fee in April.
Some business owners try to avoid the franchise tax fee altogether by forming a business in another state. This can be a good idea if you and your business have no other connections to California. But remember that California imposes the fee on all business entities that are doing business in the state. If your company will be transacting business in California, it will have to pay the fee even if it was formed in another state. How much does it cost to start a business in California? In addition to the cost of filing formation paperwork, you must factor in the $800 minimum California Franchise Tax Fee. If it’s near the end of the year, consider waiting until the new year to file your organizational documents so that come spring, you’ll only owe one year’s fee instead of two. Legislative Update Gives Exemption to New California Limited Liability CompaniesLLCs registered to do business in California must pay an annual franchise tax of $800 to the state’s Franchise Tax Board (FTB). However, to relieve some of the financial pressures amid the pandemic for newly formed businesses, California Governor Gavin Newsome signed legislation in 2020 to exempt startups from paying the LLC franchise tax during their first year in business. This is welcome news for aspiring business owners in the Golden State! The new rules established by the state’s 2020 Budget Act (AB 85) exempt any LLC that organizes, registers, or files with the California Secretary of State on or after January 1, 2021 and before January 1, 2024, from paying the $800 minimum tax in their first taxable year. This exemption also applies to newly formed Limited Partnerships (LPs) and Limited Liability Partnerships (LLPs). Previously, only corporations were exempt from paying the franchise tax in their first tax year. California AB 85 and the 15-day ExemptionBefore the new legislation, there was already a 15-day rule that exempted LLCs from paying the annual franchise tax in their first year IF they have a “short” first tax year. The criteria:
How that worked is if an LLC registered in California (on a calendar year basis) on or after December 17 and did not conduct business until after December 31, it would not have to file a tax return and pay the minimum tax for that short tax year. The entity’s first tax year would be considered the following calendar year. So, what happens with LLCs that formed in the last half of December 2020 and took advantage of the 15-day rule for the 2020 tax year? Well, it appears that they will need to pay the minimum annual tax in the tax year 2021. In a December 2020 Tax News Update, the FTB shared, “However, AB 85 only provides an exemption from the annual tax for LLCs, LPs and LLPs that organize, register, or file with the Secretary of State on or after January 1, 2021, and before January 1, 2024. Therefore, entities taking advantage of the 15-day rule by registering on December 17, 2020, and on or before December 31, 2020, are not eligible for the first year tax exemption, regardless of whether the 15-day rule would apply for that short period. Only LLCs, LLPs, or LPs that organize, register, or file after January 1, 2021, are eligible for the first taxable year annual tax exemption.” Annual $800 Minimum Franchise Tax After the First Tax YearWhen an LLC that has formed or is doing business in California is in its second tax year, it must begin to pay the $800 annual minimum franchise tax each year until it formally dissolves. Note that LLCs that have elected to be treated as corporations for tax purposes do not pay the $800 franchise tax. They instead pay a 6.65 percent alternative minimum tax (AMT). Due Date and How to PayBusinesses must pay the annual franchise tax payments by the 15th day of the fourth month of each taxable year. LLC owners should use the LLC Tax Voucher form (FTB 3522), which can be submitted and paid online with a credit card, through the FTB’s Web Pay portal, or through electronic funds transfer from a bank account. The FTB also accepts payments by mail sent to: Franchise Tax Board FTB 3522 is relatively straightforward. However, if you want to move that task off your plate so that you can concentrate on growing your business, ask CorpNet to assist in filing it (along with your other state-required filings) to ensure you stay in good standing with the state. Other California LLC Annual FeesLLCs that make more than $250,000 of California income must pay an additional LLC fee. Those fees vary by income range. Current Fee Amounts*
LLCs with estimated income in California in one of the above ranges must estimate the fee they will owe and make an estimated fee payment by the 15th day of the sixth month of the current tax year. The form to use is FTB 3536 (Estimated Fee for LLCs). CorpNet can assist you in preparing and filing that form, too. California LLC Income TaxMost LLCs in California also have to file Form 568 (Limited Liability Company Return of Income) each year. This form reports LLCs’ annual tax and LLC fee. It’s also used for reporting the income, losses, etc. of multi-member LLCs that elected classification as a partnership. The California income tax schedules that must be submitted with Form 568 and tax rates depend on the LLC’s classification:
Our Filing Experts to Help You Start an LLC in CaliforniaWith the annual minimum franchise tax exemption, these next few years are an ideal time to start a business in California—and CorpNet is here to assist you! Our business filing experts have in-depth knowledge of and experience with California’s registration and tax filing requirements. We save business owners precious time and give them peace of mind by preparing and submitting Articles of Organization, annual and franchise tax forms, licenses and permits, EIN application, and more. Contact us for a free consultation! Sources and Resources: https://www.ftb.ca.gov/file/business/types/limited-liability-company/index.html *According to the ftb.ca.gov website on March 5, 2021 
Nellie Akalp is an entrepreneur, small business expert, speaker, and mother of four amazing kids. As CEO of CorpNet.com, she has helped more than half a million entrepreneurs launch their businesses. Akalp is nationally recognized as one of the most prominent experts on small business legal matters, contributing frequently to outlets like Entrepreneur, Forbes, Huffington Post, Mashable, and Fox Small Business. A passionate entrepreneur herself, Akalp is committed to helping others take the reigns and dive into small business ownership. Through her public speaking, media appearances, and frequent blogging, she has developed a strong following within the small business community and has been honored as a Small Business Influencer Champion three years in a row. Do I need to pay 800 LLC fee the first year?California law generally imposes a minimum franchise tax of $800 on every corporation incorporated, qualified to transact business, or doing business in California. A corporation that incorporates or qualifies to do business in California is exempt from paying the minimum franchise tax in its first taxable year.
Do you have to pay the $800 California S Corp fee the first year?The CA Franchise Tax Board does not charge a first-year fee for new businesses formed in the last 15 days of the year. Therefore, a business formed at the end of December will only be responsible for one $800 payment in April.
How can I avoid $800 franchise tax?Thus, the only way to avoid the tax is to dissolve the company. Additionally, another important detail to note is that if you change your business structure during the year–for instance, from an LLC to a C corporation–you would then be subject to the minimum franchise tax on both entities for that year.
Do I have to pay franchise tax in California the first year?Newly Incorporated or Qualified Corporations
Your first tax year is not subject to the minimum franchise tax. After the first year, your tax is the larger of your California net income multiplied by the appropriate tax rate or the minimum franchise tax.
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Do you have to pay the $800 california llc fee the first year 2022
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