CA LLC Taxes: Everything You Need to Know
CA LLC taxes offer some unique tax advantages compared to other structures, such as corporations. 3 min read
CA LLC taxes offer some unique tax advantages compared to other structures, such as corporations. In California, business owners must pay a franchise tax and an alternative minimum tax. Corporations must also pay a corporate income tax. The exact amount you pay, however, depends on factors such as your total income, your entity type, and more. Learn more about what taxes and fees apply to the LLC structure to help you budget correctly, secure the capital needed, and set your business up for long-term success.
What Kind of Tax Will You Owe on Your Business Income?
LLCs around the nation pay annual taxes, but the tax rate varies depending on the state where your business is registered. Your business's structure also affects what you pay in taxes.
Corporations, for example, must usually pay a corporate income tax. Then, the individual members of that corporation must pay taxes on their personal income. For LLCs, S corporations, partnerships, and sole proprietorships, only the individual members pay taxes on their adjusted gross income.
What Is the Tax Rate for Personal Income Tax and Corporate Income Tax?
The personal income tax rate and corporate income tax rate are different in every state:
- Some states only have corporate income tax.
- Some states only have personal income tax.
- Corporate rates typically range between 4 and 9 percent.
- Personal rates vary based on personal income. In states that collect personal income tax, the tax rate can reach up to 9 percent.
In addition to personal income tax and corporate income tax, some states charge either a franchise tax or privilege tax.
What Is the Franchise or Privilege Tax?
The rate for franchise taxes also varies based on the business's structure and location.
Some states, such as California, charge a franchise tax in addition to state taxes. This is a flat tax, so you won't pay any more or less based on how much money your business makes each year.
California's franchise tax applies to the following business types:
- S corporations
- Limited liability companies (LLCs)
- Limited partnerships
- Limited liability partnerships
- C corporations
California LLC Taxes and Fees
Almost all California LLCs pay an $800 LLC tax every year. This is also known as the franchise tax. This fee also applies to companies that are registered to do business in the state.
California LLCs follow this tax schedule:
- Businesses that earn less than $250,000 per year pay $800 for California LLC taxes.
- Businesses that make between $250,000 and $499,999 per year pay a California LLC tax of $800 and an LLC fee of $900.
- Businesses that make between $500,000 and $999,999 per year pay a California LLC tax of $800 and an LLC fee of $2,500.
- Businesses that make between $1,000,000 and $4,999,999 per year pay a California LLC tax of $800 and an LLC fee of $6,800.
- Businesses that make more than $5,000,000 per year pay a California LLC tax of $800 and an LLC fee of $12,590.
Even if a business only operates for part of a calendar year, the entire $800 franchise tax is owed. Business owners in the state must plan the opening and closing of their businesses carefully if they want to avoid paying the franchise tax for years when they won't be doing much business. LLCs can also be structured to start on a fiscal year instead of a calendar year to avoid paying the annual franchise tax for a partial period.
There are also some exceptions where a business won't be charged the annual California franchise tax:
- If the LLC briefly starts late in a calendar year but doesn't do any real business, the tax may be waived.
- Tax-exempt nonprofits don't pay the California LLC tax.
- Some LLCs that deployed members of the U.S. military own are exempt.
- LLCs structured as S corporations don't have to pay the annual franchise tax.
Outside of these exemptions, all California LLCs are subject to the $800 franchise tax each year regardless of annual sales and how active they are in the state.
Also note that if your California LLC becomes inactive, you will still have to pay the annual franchise tax. Business owners owe this amount every year until the business is dissolved.
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