The $800 minimum franchise tax is the minimum franchise fee that a corporation will have to pay to operate in California, which is similar to the tax situation in many states. 3 min read updated on January 01, 2024
$800 Minimum Franchise Tax Overview
The $800 minimum franchise tax is the minimum franchise fee that a corporation will have to pay to operate in California, which is similar to the tax situation in many states. What is not similar, however, is the structure and rate of this tax. For California companies, the franchise tax will be either a percentage of their income or $800, whatever is larger.
In California, the tax rate for corporations is:
- S corporations: 1.5%
- C corporations: 8.84%
- Professional corporations: 8.84% unless they elect S corp status
Whether or not a corporation is native to the state or not makes no difference insofar as the tax rates are concerned: domestic and foreign (out-of-state) businesses both pay the same tax rate. Likewise, whether or not a corporation is active, inactive, filing a short-period return (under 12 months), or operating at a loss has no effect on the tax rate. This means that even if your company does not operate and shows no profit, it must still pay the $800 minimum by virtue of existing. 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.
This franchise tax, either single or double, must be paid in the first quarter of your business’s accounting period regardless of the business’s status. In most cases, this tax will be due by the 15th of April. Paying the minimum franchise tax may be done by either using Form FTB 100-ES or California’s Web Pay for Businesses, both of which are submitted to the Franchise Tax Board.
Franchise Tax Exemptions
Because of its unusually high franchise tax rate, California has gained a reputation as being a state unwelcoming to new businesses, even though state tax requirements are based on where business is conducted, not where a business is incorporated, so foreign businesses would be subject to the same tax. This is as it would be in many other states, as taxing foreign companies as domestic companies is common. Nonetheless, the reputation persists, even though there are some important exemptions to the tax:
- The First-Year Exemption. California will waive the minimum franchise tax for the first year a corporation exists. Instead, the franchise tax on net income will be applied, which may be less than the $800 minimum a company would normally have to pay. This exemption was passed specifically to combat the reputation that California was a state adverse to new business, or business in general.
- The 15-Day Rule. If a business incorporates within 15 days of the end of the tax year and does not conduct business in those 15 days, then it will not be subject to the minimum franchise tax. If this occurs, then the corporation will not be required to file a return, and thus no tax can be applied. The next tax year will be counted as the first tax year, and the first-year exemption will be in effect.
- Tax-Exempt Status. In certain special situations, companies may be granted tax-exempt status from the California Franchise Tax Board (FTB) or the California Constitution. This mostly applies to nonprofit organizations, such as charities, as well as certain veteran organizations.
Despite these exemptions, there are a variety of schemes out there to dodge the franchise tax, but they are mostly doomed to eventual failure. Aside from the above three exemptions, the only legitimate way to avoid paying the $800 franchise tax is to run a sole proprietorship, as they are not subject to the tax.
However, operating your business as a sole proprietorship comes with its own risks, the main one being that you will have no liability protection for your personal assets should you get sued, which would not be the case were your running an LCC or S corp. That said, if you are running a very small business with low risk of legal exposure, a sole proprietorship may still be the best choice for you.
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FAQs
Assembly Bill 85 provides a first-year exemption from the $800.00 annual tax to limited partnerships, limited liability partnerships, and limited liability companies that organize or register with the California Secretary of State on or after January 1, 2021, and before January 1, 2024.
What is the minimum $800 tax to the California Franchise Tax Board? ›
Every LLC that is doing business or organized in California must pay an annual tax of $800. This yearly tax will be due, even if you are not conducting business, until you cancel your LLC. You have until the 15th day of the 4th month from the date you file with the SOS to pay your first-year annual tax.
Do California corporations have to pay the $800? ›
Every corporation that is incorporated, registered, or doing business in California must pay the $800 minimum franchise tax.
Is the $800 LLC fee deductible for California? ›
Every year after that, the tax payments are due on the 15th of the fourth month of your tax year — April 15 for most businesses. Plus, California's LLC annual fee is tax deductible for federal taxes. You can deduct the $800 Franchise Tax – and any additional annual fee you pay.
What happens if you don't pay $800 California LLC tax? ›
California Franchise Tax is the annual tax for conducting business in California. For noncorporate entities, it is a flat fee of $800. For corporate entities, the fee is a minimum of $800. Failure to pay the franchise tax will result in a minimum penalty of 5% and a maximum penalty of 25% of the unpaid tax.
What are the new LLC rules for 2024? ›
New Rule Requires Small Businesses and LLCs to Report Ownership Information. Share: As of Jan. 1, 2024, many businesses will be required to report beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN) to identify those who directly or indirectly own or control the company.
How do I pay $800 minimum franchise tax for an S Corp? ›
The California Minimum Franchise Tax of $800 will be automatically calculated for applicable corporate and S corp returns on CA Form 100, page 2, line 23 or CA Form 100S, page 2, line 21. The amount due for the current return can be paid via the PMT screen or with voucher CA 3586-V.
Who is exempt from California franchise tax? ›
Newly incorporated or qualified corporations are not required to pay the minimum franchise tax in their first taxable year. Corporations are also not subject to the minimum tax if both of the following are true: They did not conduct any business in California during the tax year. Their tax year was 15 days or fewer.
Which entities must pay an $800 annual fee to the state of California? ›
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 every year? ›
S corporations are subject to the annual $800 minimum franchise tax.
California does tax S Corps
Also, all LLCs and S Corps must pay a minimum franchise tax of $800 annually, except for the first year. Your business will be required to pay these taxes in advance four times per year in the form of estimated corporate taxes.
Who needs to pay CA franchise tax? ›
All businesses registered with the state of California have to pay the California Franchise Taxes (except for tax-exempt businesses like nonprofits). This means that C corps, S corps, LLCs, LPs, LLPs, and LLLPs all are all responsible for the California Franchise Tax.
Is California waiving LLC fees? ›
Since July 1, 2022, the filing fees required to be paid for the registration of new corporations, limited liability companies (“LLCs”) and limited partnerships (“LPs”) with the California Secretary of State (the “Secretary of State”) have been waived. California's Budget Act of 2022 (the “Budget Act”), which provides ...
Why is California waiving LLC fees? ›
It is the Legislature's intent to encourage business growth in California by waiving fees established in state law for the creation of business entities for the fiscal year of 2022‑23.
Is first year LLC fee waived for California? ›
For tax years beginning on or after January 1, 2021, and before January 1, 2024, LLCs that organize, register, or file with the Secretary of State to do business in California are not subject to the annual tax of $800 for their first tax year.
Is the CA LLC fee due for the first year? ›
Typically, the LLC franchise fee is due by April 15th every year, but for new LLCs, the first franchise fee is due by the 15th day of the fourth month after your LLC is filed. The month your LLC is filed counts as Month 1, regardless of whether you file on the first of the month or the last of the month.
Is the first year exemption for LLC fees in California? ›
California LLCs after Assembly Bill 85:
California LLCs don't pay an $800 fee for their 1st year (if the LLC is formed after January 1st, 2021).
Do you have to pay a $800 California S Corp fee every year? ›
All California LLCs or corporations that choose S Corp taxation must pay a 1.5% state franchise tax on their net income. This is paid by the business itself, not the LLC members or corporate shareholders. Also, all LLCs and S Corps must pay a minimum franchise tax of $800 annually, except for the first year.
