Tax Blog

California $800 LLC Franchise Fee

The $800 minimum franchise tax is the minimum franchise fee that a corporation will have to pay to operate in the state of California. There are other states with this fee requirement, but we will focus on California.

Overview of the $800 Minimum Franchise Tax

As I stated above, the $800 minimum franchise tax is the minimum franchise fee that a corporation will have to pay to be able to operate in the state of California. Other states enforce a similar fee, but there are differences in the structure of this particular tax fee. For companies that run and operate in California, the franchise tax will be either a percentage of income or $800, whichever is larger.

In California, there are different tax structures for different types of corporate entities. You have:

  • S – Corporations at 1.5%
  • C – Corporations at 8.84%
  • Professional Corporations at 8.84% unless they choose to be taxed as an S – Corporation status.

So, whether or not a corporation is a native of the state, the tax rates will not differ. Domestic and foreign (not formed in California – so out-of-state businesses) will pay the same tax rate. Whether a corporation is active, inactive, filing for a short period (12 months), or is operating at a loss, it will not affect the tax rate. The same goes for those companies that have a $0 profit, are still required to pay the $800 tax. There is only one way to avoid the $800 minimum franchise fee, and that is by dissolving the company.

The franchise fee will have to be paid in the first quarter of your business’s accounting period, regardless of business status; in most cases, that would be April 15th. You must pay the fee by using FTB 3522 or by paying online at the Franchise Tax Board.

Are there exemptions to paying the $800 fee?

Thanks to the extraordinarily high franchise tax rate, California has garnered a reputation as a state that does not welcome new businesses, even though state tax requirements are based on where business is conducted, not where it’s incorporated, so a “foreign” business would be subjected to the same tax.

This is actually the way other states operate as well, not just California.

  • First-year exemptions. California will waive the franchise fee for the first year a corporation exists. Instead, the franchise tax on the corporation’s net income will be applied, which may be less than the $800 fee.
  • The 15-day rule. If a business operates within 15-days of the end of the tax year with no business conducted, it will not be subject to the franchise tax. The following year would be considered the first fiscal year, and the fee would begin applying.
  • Tax-exempt status. In certain situations, a company may be granted tax-exempt status by the California Franchise Tax Board (FTB) or the California Constitution (yes, every state has one). These would mainly be companies working as not-for-profit organizations, some veteran organizations, or charities.

Regardless of these exemptions, there are many schemes out there to try to avoid paying the tax, but they always fail. Besides the above three exemptions, the last and true way to avoid the fee is to be a sole proprietorship; they are exempt from the tax.

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