The amount of franchise taxes you have to pay plays a huge role in the decision of whether or not to start, or register an existing business, in California. If you own a limited liability company (LLC), corporation, or other legal entity in California, you will be subject to the minimum annual franchise tax of $800 per year.
If you are still weighing this decision, here are a few things to consider.
15 Day Exception
You are not subject to the annual franchise tax for a specific year if both of the following apply: (1) you did not conduct any business in CA during the tax year, and (2) your tax year was 15 days or less.
Thus, if you accidentally started a company and want to immediately cancel it, you can avoid the franchise taxes (assuming you do so speedily).
First Year Exemption for Corporations
If your corporation incorporates or qualifies to do business in CA, you are not subject to the minimum franchise tax during your first year of operations. However, you are still liable for any franchise tax on your net income. This exception will also apply to an LLC treated as a corporation. Standard LLCs must pay the minimum franchise fee of $800 during their first year of operations.
Income Earned in CA and Other States
California applies the unitary method to determine your tax liability. Under this method, all of the elements comprising your trade or business are viewed as one unitary business, whether or not the activities of your business are conducted in separate corporate forms. The business income of your unitary business is then divided and assigned to CA by means of an apportionment formula.
Converting to a New Type of Business Entity
If your business entity converts to an LLC during the current year, it generally will have tax liability and filing requirements as both the previous business entity and the new entity.
Due Dates for First California Annual Franchise Tax Payment
For LLCs, you have until the 15th day of the fourth month after you file your Articles of Organization with the Secretary of State to pay the California annual franchise tax. Recall that corporations don’t owe the franchise tax the first year. In the years ahead, and for corporation’s second calendar year conducting business in California, you have until April 15th to pay your annual franchise taxes.
This article discusses general issues surrounding a legal entities franchise taxes within California. You are encouraged to speak with a business attorney or CPA to discuss your specific situation. For all inquiries please contact us at info@bendlawoffice.com, or (415) 633-6841.
Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.