California is an amazing place to own your own business. With its massive economy, the potential for growth feels endless. If you want to succeed, though, It’s important to understand rules and responsibilities, like the California franchise tax.
California’s franchise tax confuses more LLC owners than almost any other state obligation. It’s an unusual tax because it’s not based on how much money your business makes. Not only is the franchise tax not an income tax, it applies whether your California LLC made money or not.
There was formerly a waiver for businesses started between 2021 and 2023 that exempted just those businesses from paying the franchise tax. Unfortunately, the AB 85 waiver has expired, and now all California LLCs owe the franchise tax from the first year iof their business.
What is the California LLC franchise tax?
The California LLC Franchise Tax is a privilege tax for the right to operate as an LLC in California. Every LLC must pay this flat fee even if you did not conduct any business during the year, unless you cancel your LLC entirely. This tax applies regardless of revenue, profit, or activity.
The LLC franchise tax is completely separate from California income tax and other taxes you owe. The California Franchise Tax Board (FTB) administers the franchise tax, and also handles other important business.
Who has to pay the California LLC franchise tax?
Any LLC formed or doing business in California must pay the California LLC Franchise Tax. Some businesses are formed in other neighboring states, such as Nevada or Wyoming, and believe they are exempt. But if those businesses operate in California, they are still subject to the franchise tax.
There are no meaningful exemptions for LLCs when it comes to the franchise tax. The only exemption was originally for the first year of operation, but the legislature allowed that to expire. If you have any questions about trying to avoid the tax, you should speak with a legal and/or tax professional.
How much is the California LLC franchise tax?
The California LLC Franchise Tax is an $800 flat minimum, due regardless of revenue or activity.
There are also additional LLC taxes for any LLC with gross receipts over $250,000 in revenue. These are flat fees also:
- $250,000-$499,000 income —> $900 fee
- $500,000-$999,999 income —> $2,000 fee
- 1,000,000-$4,999,999 income —> $6,000 fee
- 5,000,000 and up —> $11,790 fee
These fees are separate obligations, not alternatives. Your franchise tax will include the original $800 plus a fee based on income, if you gross at least $250,000.
Figures can change over time, and you should verify with the FTB to make sure you meet your obligation. This is a fairly new tax, and it is worth keeping an eye on it. It’s also worth noting that there are other California LLC cost factors to be aware of.
What happened to the AB 85 first-year exemption?
The state of California originally carved out an exemption, AB 85, that temporarily waived the $800 flat fee for LLCs formed between 2021 and 2024. That exemption has expired because legislators chose not to renew it. All new LLCs owe the franchise tax from year one as of 2024.
Unfortunately, many guides still reference the old waiver. That can be confusing because the waiver is expired. It is always possible that California will revisit the waiver to help out new businesses, but as of right now, every CA LLC owes the franchise tax from the first year in business.
When is the California LLC franchise tax due?
California makes it easy to know when to pay. During the first year, you should be aware that you owe the California LLC Franchise Tax on the 15th day of the 4th month after formation. Every year after that, you will pay the tax on April 15, the day people think of as Tax Day.
The fee for estimated gross receipts is due on June 15 of the current tax year.
You may fall into a back-to-back payment trap if you form your LLC late in the year. For example, if you start your business in October, you may not owe the first franchise fee until March, but you will still need to pay the fee for the new year on April 15.
How to pay the franchise tax
It is easy to pay the California LLC Franchise Tax, but it is important to make sure you do it correctly to ensure the state gives you the correct credit. You will pay the $800 flat fee via Form FTB 3522, while you will pay the gross receipts fee via Form FTB 3536. Your annual return will be on Form 568. All the forms are on the state website.
Keep in mind that payment and filing are separate. Submitting Form 568 does not substitute for Form 3522. California also allows you to file your documents online at no extra charge.
You can pay online at ftb.ca.gov or by mail.
What happens if you miss the deadline?
You can run into trouble by missing a deadline, by paying too little, or even by paying by mail if you were required to pay online. There are specific penalties you will face if any of those things were to happen.
Penalties
When calculating penalties, the state figures out the number of days you are late and multiplies by the effective interest rate for that installment period. A business will probably owe 10% of the unpaid amount.
What happens during suspension?
When your business is suspended, you have no rights or privileges when it comes to doing business in California. You cannot operate or take in money or anything else.
Reinstatement of your LLC
If your LLC is suspended for nonpayment, you will need to take these steps:
- File all past-due tax returns
- Pay all outstanding taxes (including penalties and interest)
- Submit an application for Certificate of Revivor, Limited Liability Company (FTB 3557 LLC)
Missing the deadline is serious but it is a problem you can fix.
Common mistakes California LLC owners make
Here are a few common mistakes made by LLC owners:
- Expecting a first-year exemption after AB 85 expired
- Confusing franchise tax with income tax
- Missing the gross receipts fee deadline (June 15)
- Assuming a dormant LLC owes nothing until formally dissolved
- Not filing Forms 3522 and 3536 separately from Form 568
How this fits into your broader LLC compliance
The franchise tax is just one piece of staying compliant in California. California, which has one of the largest economies in the world, has a large number of rules and regulations.
Just a few of the other important issues you need to understand include:
- having a California registered agent, who will be the contact person receiving legal mail for your business;
- the LLC Statement of Information, which you will need to file at certain times to give the state necessary information, and
- getting an EIN (Employee Identification Number). The EIN acts as the social security number for the business, allowing you to do important tasks such as paying taxes and hiring employees.
All of this can be overwhelming, especially for people who don’t have a business background. Companies like Tailor Brands exist just to help businesses with important tasks like LLC formation, getting an EIN, providing a registered agent, and ongoing compliance support. This takes the pressure off the LLC so you can focus on growing your business.
Conclusion
The California LLC Franchise Tax is predictable once you know the rules. $800 is a known cost of doing business in California. This is just one of your many responsibilities, though, and it is helpful to seek assistance from people who are accustomed to dealing with all these issues.
As always, you should verify current figures with the FTB or a tax professional. The penalties can be serious if you are not in compliance, but you can get the support you need to deal with all of these issues and have a thriving, successful business.