If you do business in California, you most likely need to pay California Franchise Tax. At a minimum of $800 per year, California’s franchise tax is one of the steepest in the country. But unless you qualify for an exemption, there’s no way to avoid paying it. We’ll tell you everything you need to know about California Franchise Tax.
What is the California Franchise Tax?
California Franchise Tax is an annual tax for the privilege of doing business in California. Corporations, LLCs, limited partnerships (LPs), and limited liability partnerships (LLPs) that do business in California are all required to pay franchise tax. Sole proprietorships and general partnerships do not register with the Secretary of State and do not have to pay franchise tax.
The franchise tax rate depends on your business tax classification, but $800 is the minimum. Here are the current California franchise tax rates:
- LLCs, LPs, and LLPs—flat fee of $800
- S-corporations—1.5% of income or $800 (whichever is greater)
- C-corporations—8.84% of income or $800 (whichever is greater)
So, if your business is taxed as an C-corporation and earns $20,000 this year, you would owe $1,680 (8.84% of $20,000). But if your business is an S-Corp and makes $10,000, you would owe $800. That’s because 1.5% of $10,000 is $150, which is less than the minimum tax of $800.
What is the California Annual LLC Fee?
If your California LLC makes $250,000 or more in a year, you will also have to pay an annual LLC fee, which starts at $900 and increases based on income.
|Net Income||Annual LLC Fee|
|$5,000,000 or more||$11,790|
What is the CA Franchise Tax first-year exemption?
In 2020, California passed legislation making any California LLC, LP, or LLP formed between January 1st, 2021 and December 31st, 2023 exempt from paying the California Franchise Tax during their first taxable year. This law was passed to help new small businesses succeed during the COVID-19 crisis. So, if you form an LLC, LP, or LLP in California before the end of 2023, you don’t need to pay franchise tax your first year. Hooray! However, don’t forget that you will still have to pay California franchise tax annually starting your second year of business.
When is the California Franchise Tax due?
The due date for California Franchise Tax depends on your business’s tax classification.
LPs & LLPs: The 15th day of the third month of your tax year. (So if your tax year starts on January 1st, your franchise tax payment would be due on March 15th.)
LLCs: For the first year, due on the 15th day of the fourth month from your formation date. For following years, the 15th day of the fourth month of your tax year.
S-corporations: The 15th day of the third month of your tax year.
C-corporations: The 15th day of the fourth month of your tax year.
How do I pay California Franchise Tax?
You can pay your franchise tax to the California Franchise Tax Board online, by mail, or in person.
How can I avoid paying California Franchise Tax?
Unfortunately, most businesses that operate in California cannot get out of paying the California Franchise Tax. LLCs and corporations are required to pay franchise tax even if the business is inactive or lost money. If you don’t pay the franchise tax on time, you’ll be charged late fees, and the California Franchise Tax Board could eventually suspend your business.
One way to avoid paying franchise tax is to operate as a sole proprietorship or general partnership—but you would have to sacrifice the liability protection that LLCs and corporations enjoy.
Some charities and nonprofits qualify for an California Franchise Tax Exemption. To apply for tax-exempt status, you’ll need to file form FTB 3500 with the California Franchise Tax Board.
Find out more about California Taxes.