California Franchise Fee: Everything You Need to Know
The California franchise fee is an important consideration for any entrepreneur opening a business in the state of California.3 min read
2. Estimated Fee for LLCs
3. Limited Liability Company Return of Income
4. Why You Should Hire an Accountant
The California franchise fee is an important consideration for any entrepreneur opening a business in the state of California. Under the California Franchise Investment Law 31011, the franchise fee is any fee that is charged to a franchisee or subfranchisor that is paid to enter into a business under a franchise agreement.
Under California law, there are some payments that are not considered the payment of a franchise fee, including:
- A purchase agreement for products at wholesale price with no obligation to purchase more than a starting inventory.
- A payment for a service charge that is considered reasonable to charge for accepting and honoring a specific credit card.
- Amounts paid to a trading stamp company under Chapter 3 of Part 3 of Division 7 of the Business and Professions Code.
Limited Liability Company Tax Voucher
All LLCs in the state of California will need to file a Form 3522 along with the $800 annual Franchise Tax no matter if they make a profit or not. This form can be found under the FTB Forms page and you will need to:
- Select the correct tax year.
- Select the taxpayer type.
- Select "Income Tax Forms."
- Download the form.
Your initial payment of $800 will need to be paid on the 15th day, four months after your LLC was approved. For example, if your LLC was formed in October, your payment will be due by January 15th, or basically 3 1/2 months. Remember that you have to pay your fee in advance for the next year, so there is a possibility that you will need to make two payments in the first year depending on when your LLC was formed.
As your business earns money, you will be required to pay different amounts based on the total amount of income earned. The fee structure is as follows:
- $900 for incomes between $250,000 and $499,999.
- $2,500 for incomes between $500,00 and $999,999.
- $6,000 for incomes between $1,000,000 and $4,999,999.
- $11,790 for incomes of $5 million or more.
Your LLC is required to pay the annual tax fee under any of the following conditions:
- It was formed in California.
- It is registered to do business with the Secretary of State in California.
- It performs business functions in California.
Estimated Fee for LLCs
If you estimate that your business will make more than $250,000 for its annual gross income, you can use Form 3536 to pay your estimated annual tax. This is referred to as an estimated tax because you will need to make well-thought projections about what you estimated annual gross income is to be before the end of the next year.
To file your Form 3536, you will need to download it from the webpage and make sure it is filed by the 15th of the sixth month after your LLC was approved. Again this is actually a total of 5 1/2 months after LLC approval. For example, if your LLC was approved in November, you will need to file by June 15th.
Limited Liability Company Return of Income
In California, all LLCs are required to file a Form 568 known as the LLC Return of Income. This is basically the state level return for your business. It will have attachments and schedules similar to what your federal return will have. You can download the forms and the instruction booklet directly from the State of California tax website. Your due date for the return will either be on March 15th or April 15th depending on how your specific LLC is taxed.
Why You Should Hire an Accountant
Because the laws for LLCs in the state of California can be complicated, it is recommended to obtain an accountant or tax attorneys that are familiar with the LLC tax laws in the state. In many states, the filing of a businesses annual tax return is simply a fill-in-the-blank update of basic information. In California, the annual report filing basically includes all of the tax filings mentioned above with the Franchise Tax Board. A certified account will be able to help you with all these returns as well as federal and local ones, and provide you with tax strategies that can give you the best advantage for the structure you have chosen.
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