California LLC Tax First Year: Everything You Need to Know
California LLC tax first year is the amount of tax that a limited liability company (LLC) in California is required to pay in its first year of operation.6 min read
California LLC tax first year is the amount of tax that a limited liability company (LLC) in California is required to pay in its first year of operation. California imposes an annual tax on almost all LLCs that are registered to conduct business in the state.
Understanding First-Year Tax for California LLCs
Almost every registered California LLC and foreign LLC must pay a minimum annual franchise tax of $800. The tax cannot be prorated for partial years, so an LLC is required to pay the entire $800 in the first and last years of operation, even if the duration of operation is shorter than a full year. However, the tax can be waived for tax-exempt nonprofit LLCs, LLCs with S Corp tax status, and LLCs under the exclusive ownership of deployed U.S. Armed Forces members that do not perform any business activity for short durations of time during a calendar year.
The LLC tax is imposed for the privilege of being able to do business in California. It will continually accrue every year until the LLC is dissolved, regardless of whether it is active or inactive. The tax is variable and applicable or not depending on the total income of the LLC for each fiscal year. While most LLCs operate on a calendar year basis, others may opt for a different fiscal year.
Every non-corporation LLC that is conducting business in California or has filed a certificate of registration or an article of organization with the Secretary of State is required to file Form 568, which is also known as the Limited Liability Company Return of Income. In addition, they must pay the minimum annual franchise tax of $800 and the LLC fee, if applicable. LLCs that are exempt from the minimum franchise fee and the LLC fee but required to report income from California must file Form 565, or Partnership Return of Income.
Every LLC that is conducting business or has established or registered to conduct business in California is required to complete and submit Form 3522 to the California Franchise Tax Board on a yearly basis. In most cases, LLCs in California must file this form.
An LLC with gross receipts of at least $250,000 for the year must report a fee on Form 568 and pay the $800 annual franchise tax. In addition, an LLC with California non-residents as members is required to submit Form FTB 3832. LLCs must know that there is a distinction between the $800 annual franchise tax and the LLC fee. The annual franchise tax is included in line 3 of Form 568, but there is a credit for it in line 6 of the same form.
When Is the Annual LLC Tax Due?
The annual franchise tax is due on April 15 for LLCs operating on a calendar year basis and 15th day of the fourth month for those that use a fiscal year. If the due date is a weekend or public holiday, it will be moved to the following business day. Additionally, payments submitted or mailed and tax returns filed on April 18 will be regarded as timely.
An LLC's first taxable year starts when it submits its Articles of Organization to the California Secretary of State. A foreign LLC's first taxable year starts at the time of its organization in another state. In the event that the 15th day of the fourth month of the taxable year of an existing foreign LLC has passed before it registers with the Secretary of State or starts doing business in California, the annual franchise tax must be paid right after it registers with the Secretary of State or starts doing business.
When Should an LLC Use Form 3522?
California LLCs should file Form 3522 if:
- The California Secretary of State has accepted their articles of organization
- They have received a certificate of registration from the Secretary of State
- They are conducting business in California
What Information is Required in Form 3522?
In order to complete Form 3522, an LLC is required to provide the following information:
- Term of fiscal year
- Name of LLC
- DBA (Doing Business As)
- Full address
- Phone number
- EIN (Employer Identification Number)
- Secretary of State file number
- Amount of payment
How to File a Form 3522
Filing a Form 3522 is relatively simple. Steps include:
- Make your check or money order payable to the Franchise Tax Board.
- Include the California Secretary of State file number, and the Employer Identification Number (EIN), and what year's FTB 3522 on the money order or check.
- Detach the payment voucher.
- Put your payment and voucher in an employer and send to: Franchise Tax Board, P.O. Box 942857, Sacramento, California 94257-0531.
- There is also an option to make the payment online, and if you go that route, there is no need to send in the Form 3522.
What Is the Penalty for not Filing the Annual Tax?
LLC annual tax payments are due by the 15th day of the 4th month after the beginning of the taxable year. If you do not pay by the due date, there will be a late-payment penalty plus interest assessed for failure to make the annual LLC tax payments. Penalties are calculated from the due date to when you make your payment.
If you cannot file the form in time, you may be eligible to file for an extension. The Franchise Tax Board has set extension dates based on your business type. LLCs are granted an automatic six-month paperless extension from the initial due date. It's important to note that the automatic extension does not extend the payment due date. If you don't pay your LLC fee or non-consenting member taxes by their original due date, the company should use a Payment Voucher for Limited Liability Companies, or FTB 3537.
Basics of Minimum Franchise Tax
California is one of many states that has a franchise tax levied against corporations and various other business types that wish to do business within California. All corporations, active or inactive, are subject to the minimum franchise tax, even if they have been operating at a loss for under 12 months or are filing a short-term return.
During its first year of business, a corporation is required to pay a certain portion of its net income. This is standard for all corporations, whether they are organized or incorporated in California, a foreign corporation qualified to conduct business, or they do business in California without being incorporated or qualified under the state's laws.
There are several scenarios where the first year's franchise tax can be waived:
- First-Year Exemption — California will waive the franchise tax for brand new corporations that have incorporated or qualify in the state since January 1, 2000. Corporations are instead liable for required franchise tax on the business's net income. This exemption is not applicable to any corporation that is not qualified by the California Secretary of State, or those that attempt to reorganize just to get out of paying the required minimum franchise tax.
- “Short Accounting Period” 15-Day Rule — Corporations whose taxable year is 15 days or less don't need to file provided they meet two criteria: They incorporate within the last 15 days of the current tax year, and they do not conduct any business during that time. They won't need to file a tax return, so this short business period is not considered the company's first tax year. Because the next tax year will be considered to be the company's first tax year, it will be exempt from this year's minimum franchise tax.
- Tax-Exempt Status — In some cases, the California Franchise Tax Board or the California Constitution may expressly grant tax-exempt status. California realized this was not immediately obvious to businesses, so to entice new companies to incorporate in California, they offered a waiver of minimum franchise tax for the first year of incorporation.
Why Some Businesses Avoid Incorporating in California
For many years, California had a reputation of being tax unfriendly towards businesses. This idea came about thanks to other states who wanted to pull businesses away from California. People believed it was unfriendly and started incorporating their businesses in states regarded as being more tax-friendly to companies.
This issue with this theory is that many states, California included, tax businesses based on where they conduct business, not what state they file documentation with. There is typically very little savings recognized by incorporating in another state and then doing business in California. Officials realized this was not immediately obvious to businesses so to entice new companies to incorporate in California, they offered a waiver of minimum franchise tax for the first year of incorporation.
This exemption is limited to California business corporations and does not apply to any business that incorporates in a different state or any other type of entity. The reason for this is because it is aimed at businesses to bring their corporations back to California rather than another state who is looking to improve its own tax base.
If you need help with California LLC first-year tax, you can post your need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.