Forming a limited liability company (LLC) will involve some degree of expenses, regardless of whether you plan to operate remotely from a home office or a shared workspace. You may be able to cut costs by incorporating in a more affordable state or acting as your own registered agent, but there is one expense that is impossible to avoid: taxes.
You’ll be required by law to pay an annual franchise tax every year after forming your California LLC. Paying the annual franchise tax is an important component of maintaining compliance for your LLC and an inevitable fact of owning a business.
From how much you’ll need to dish out each year to which situations allow you to file for an exemption, here’s everything you need to know when it comes to the annual California franchise tax.
What is the Annual Franchise Tax
The annual franchise tax is a type of business tax required in the state of California and about a dozen other states. The name itself is a bit misleading, as it doesn’t matter whether your business is a franchise or not – it applies to all LLCs doing business in California.
Not sure if you fall under that category? If your business offers limited liability, you are responsible for paying the annual franchise tax. This includes limited liability companies (LLCs), S corporations, C corporations, limited partnerships (LPs), and limited liability partnerships (LLPs). Therefore, if you have an LLC, you will need to pay the annual franchise tax of $800 a year.
You are required to pay the minimum fee regardless of whether your business is operating and/or making a profit. There are a few scenarios in which you may be exempt from paying the annual franchise tax; you’ll learn more about those later on in here.
For now, let’s cover the basics.
What Does It Mean to “Do Business” in California
You will need to pay the annual franchise tax in the state of California if you are doing business within the state, even if you formed your LLC elsewhere.
For example, you originally formed your LLC in Nevada, but you conduct in-person meetings with clients in California. This would be considered doing business out of state, and you’d be responsible for paying the annual franchise tax.
Other activities that are treated as doing business in California include:
- Operating out of or having a physical presence in California
- Having or applying for a business license in California
- Deriving significant portions of your company’s revenue from California
- Having employees that work in California or having to pay state payroll taxes
When is the Annual Franchise Tax Due
The annual franchise tax is due on the 15th day of the fourth month from the date you file your business with the California Secretary of State.
Say you form your online bag business, Helen’s Bags LLC, and register with the Secretary of State on February 10, 2021. In this case, your annual franchise tax would be due on May 15, 2021. Your California LLC is approved in February, thus February would be counted as “Month 1” and the fourth month after would be May.
In subsequent years, the California franchise tax is due on April 15. If the due date falls on a weekend or holiday, the deadline to file and pay without penalty is extended to the next business day.
Pro-tip: You may find it useful to set a Google Calendar alert ahead of time so that you are reminded to make your payment well before the deadline.
Additional LLC Fees and Filing Requirements
Tax time rolls around and your online bag business has made $255,000 in income this year. A job well done! You now owe the annual franchise tax ($800) plus an extra $900 in additional fees.
The minimum amount you’ll have to pay for annual franchise tax is $800. However, if your LLC makes over $250,000 in annual gross receipts (total revenue) in the state of California, you will be required to pay an additional fee (see the chart below for specifics) on top of the annual franchise tax.
Estimated LLC Fees
Use the chart from the State of California Franchise Tax Board to figure out how much your LLC will owe in taxes this year.
Your LLC must pay the fee by the 15th day of the sixth month of the current tax year. For example, if your California LLC is approved in May 2022, then May is considered ‘Month 1’, while the sixth month would be October. Therefore, the due date would be October 15, 2022.
After the first due date has passed, any future estimated fees must be paid and filed by June 15 each year. You can learn more here.
Limited Liability Return of Income (Form 568)
There’s one last tax form you’ll have to file annually as a California LLC owner: Form 568. This is the state-level tax return for your LLC. You will have California-specific schedules and forms attached to it. For detailed information and due dates, you can visit the Limited Liability Company Tax Booklet (568 Booklet).
How to Pay the California Annual Franchise Tax
There are three ways in which you can pay the annual franchise tax: via California’s Web Pay for Businesses, by credit card, or by mail.
Here are step-by-step instructions for paying with each one of the methods listed above:
To pay the annual franchise tax via Web Pay:
- Navigate to the State of California Franchise Tax Board website
- Select “Bank Account”
- Select “Web Pay business”
- Fill out the requested information to complete your payment
To pay the annual franchise tax by credit card:
- Navigate to the State of California Franchise Tax Board website
- Select “Credit Card”
- Select “Pay now with ACl payments” under the ‘Business’ category
- You will then be redirected to a secure website where you can use a Discover, MasterCard, Visa, or American Express Card to make your payment
To pay the annual franchise tax by mail:
- Download and fill out form FTB 3522
- Using black or blue ink, make a check or money order payable to the “Franchise Tax Board”
- Write the California SOS file number, FEIN, and “2022 FTB 3522” on the check or money order
- Remove the payment voucher from the bottom of the page. Mail this along with your payment (do not staple the two together) to:
FRANCHISE TAX BOARD
PO BOX 942857
SACRAMENTO CA 94257-0531
Pro-tip: You will incur a 2.3% service fee if paying by credit card. If you want to avoid this extra charge, you should opt to make your payment via Web Pay or mail.
Can I Get Out of Paying the Annual Franchise Tax
There are two circumstances in which you may be able to get out of paying the annual franchise tax. You can either claim one of the exemptions listed below, or dissolve your LLC. If any of the following categories apply to your LLC, you do not need to pay the annual franchise tax.
The 15 Day Rule
If you incorporate your business within 15 days of the end of the tax year, but do not conduct business in those 15 days (both requirements need to be met in order to claim this exemption), you are not required to pay the minimum franchise tax. Since you won’t need to file a tax return, no tax can be applied. Instead, the following year will be considered your first tax year.
Short Form Cancellations
If you decide to dissolve your LLC within one year of organizing, you can file for short form cancellation (Form LLC-4/8) with the Secretary of State. You will not be required to pay the annual $800 tax for its first tax year.
First Year Exemption
Thanks to the state’s 2020 Budget Act (AB 85), any California LLC registered between Jan 1, 2021 and Dec 31, 2023 will not have to pay the annual franchise tax during their first year in business. In this case, your annual franchise tax would be due the following year (your second taxable year).
Note: You should consult with a professional accountant before proceeding to claim any of the exemptions stated above.
Find a Certified California Accountant
It’s important to be aware of how much you’ll owe each year in taxes so that you can budget accordingly.
In the end, the minimum amount you’ll pay annually is $800, but you may owe more if you’ve exceeded $250,000 in annual income (see the chart above). There are other state level fees that might apply, and though somewhat rare, you may be able to apply for an exemption in certain situations.
If you have additional tax-related questions, you may want to reach out to the California Franchise Tax board for guidance.