Key Takeaways

  • The LLC minimum tax is a state-imposed fee—such as California’s $800 annual franchise tax—often required regardless of profitability.
  • LLCs are generally taxed as pass-through entities, meaning profits and losses flow to members’ personal tax returns, unless the LLC elects corporate taxation.
  • Electing corporate taxation can reduce tax rates for retained earnings but may result in double taxation on distributed profits.
  • Some states impose both income-based taxes and flat annual fees, while others have no minimum tax requirement.
  • Certain exemptions or temporary waivers may apply for new or inactive LLCs in specific states.

The LLC minimum tax is exemplified by the minimum $800 payment that limited liability companies, which are legally qualified to do business in California, make to the state government annually. It's also called a "franchise tax" in California and some other states. States charge different rates, but this tax is based on the net worth of the LLC's capital instead of its income. 

How the IRS Taxes LLC Members

LLCs aren't taxable organizations like corporations. Rather, the IRS describes them as “pass-through” entities, similar to sole proprietorships or partnerships.

That's because their profits and losses “pass through” the business to the owners, who are known as members and provide their business income data on their individual tax returns.

The IRS considers an LLC a partnership or a sole proprietorship, depending on how many members it has. A single-member LLC works like a sole proprietorship and doesn't file tax returns with the IRS. Instead, the owner of the LLC submits profit and loss information with their 1040 tax returns, on Schedule C. Even if they reserve profits in the bank at the end of the year to run and grow their business in future, the reserved money is taxable.

The IRS deals with LLCs with multiple owners as partnerships for tax reasons. Like single-member LLCs, they don't pay corporate income taxes. Instead, their owners individually pay taxes on how much profit they make from running the LLC, with Schedule E attached.

The IRS assumes that LLC owners receive their complete distributive shares annually. So, they're each required to pay taxes accordingly, whether the LLC completely distributes the shares or not.

Though multiple ownership LLCs don't pay taxes, they have to provide accurate information for the IRS on Form 1065, which the IRS verifies. Each member of the LLC must get a Schedule K-1 from their LLC to enable them to clearly document their individual shares of profits and losses. That way, they can report their profits and losses via a personal Form 1040 with Schedule E attached.

State-Specific Minimum Taxes and Annual Fees for LLCs

While the IRS does not impose a federal LLC minimum tax, many states levy mandatory annual fees or franchise taxes on LLCs, regardless of income. These charges vary widely:

  • California – $800 annual minimum franchise tax plus an additional fee if annual revenue exceeds $250,000.
  • Delaware – Annual tax is $300 for LLCs, due June 1, regardless of activity level.
  • Texas – No annual minimum tax, but franchise tax applies if revenue exceeds the no-tax threshold.
  • New York – Annual filing fee ranging from $25 to $4,500 depending on gross income.
  • Nevada & Wyoming – No income tax or minimum franchise tax, though small annual business license or report fees apply.

These fees are separate from income taxes and must be paid even if the LLC has no profit or is inactive. Failure to pay can result in penalties, interest, or administrative dissolution.

Electing Corporate Taxation

LLC owners who mostly keep significant amounts of profits in their LLCs (called “retained earnings”) can take advantage of “electing corporate taxation,” which came into effect for “C” corporations in 2018.

Electing corporate taxation is an LLC's request to be recognized as a taxable, corporate entity. The LLC only has to file Form 8832 for the IRS to change their entity classification.

Electing corporate taxation has the advantage of reducing an LLC's taxes by charging a flat 21 percent tax on its collective profit, instead of each member paying 32 percent or more. The disadvantage of electing corporate taxation is that it doesn't exempt shareholders from paying their individual taxes, resulting in double taxation. However, electing corporate taxation allows LLC owners and employees to enjoy stock ownership plans, stock options, and other benefits, which aren't liable to double taxation.

Unlike employees, LLC members don't contribute to Medicare and Social Security. However, they pay self-employment taxes from personal profits, except those who aren't actively serving the LLC and making executive decisions. LLC members pay twice the amount regular employees pay in taxes because employers pay half the tax for their employees.

Most states treat LLCs as the IRS does. Therefore, LLCs don't pay taxes to the states. Instead, LLC members pay taxes individually. However, some states tax LLCs according to their corporate revenue in addition to the taxes the individual owners pay. For example, California levies LLCs between $900 and $11,000 if they make over $250,000 annually.

Furthermore, some other states impose yearly, non-income fees on LLCs, which may be called “an annual registration fee,” “a franchise tax,” or “a renewal fee.” Most states charge LLCs $100 annual registration fees, but California charges a whopping $800 “minimum franchise tax” annually.

Impact of LLC Minimum Taxes on Tax Elections

Choosing to have your LLC taxed as a corporation (C or S corp) does not exempt you from state-level minimum taxes or annual fees. For example, in California, the $800 minimum franchise tax applies whether the LLC is taxed as a partnership, disregarded entity, or corporation.

However, tax elections can affect the amount of income tax owed in addition to the minimum fee. For instance:

  • A C corporation election subjects the LLC to the corporate tax rate (21% federal) plus potential state corporate taxes, alongside the annual minimum tax.
  • An S corporation election may lower self-employment taxes for active members, but the minimum franchise tax still applies in most states.

When deciding on a tax classification, factor in both the ongoing minimum tax obligation and the potential federal and state income tax savings.

Business Income Tax in California

The franchise tax of California, which is a tax on running a business in California, is applicable to S corporations, limited partnerships, C corporations, limited liability partnerships, and LLCs electing to be considered corporations.

California Minimum Franchise Tax Rules and Exceptions

California imposes an $800 minimum franchise tax on most LLCs each year, even if the business reports no income. This fee applies whether the LLC is active, inactive, or operating at a loss.

Exceptions and reductions:

  • First-Year Exemption – New LLCs formed or qualified in California are exempt from the $800 fee for their first taxable year (through at least 2024 under current law).
  • Short-Year Adjustments – If an LLC’s first tax year is less than 12 months, it still owes the full $800 unless it qualifies for the first-year exemption.
  • Non-Operating Status – LLCs that formally cancel their registration before the start of a tax year may avoid the fee for that year.

It’s important to distinguish the $800 annual tax from the gross receipts fee, which applies to LLCs making $250,000 or more in annual revenue and can range from $900 to $11,790.

How to Escape the Franchise Tax of California 

There are two ways to escape the $800 franchise tax of California:

  •  Be a sole proprietor. This has a disadvantage of denying you liability protection of personal assets.
  • Incorporate in another state where there's no corporate income tax and cancel your qualification for business in California. 

LLC taxes can be cut, but going it alone might land you in serious trouble. To play it safe, you need competent, legal help.

States Without an LLC Minimum Tax

Not all states impose an annual minimum tax or franchise fee. Forming your LLC in one of these jurisdictions may lower your fixed costs, although doing so only makes sense if you do not have to register as a foreign LLC in your home state.

States with no mandatory LLC minimum tax include:

  • Wyoming – Only a small annual report fee based on assets located in the state.
  • South Dakota – No income tax or annual LLC fee beyond basic filings.
  • New Hampshire – No general annual LLC fee, though business profits tax applies to higher earnings.
  • Nevada – Requires a business license fee and annual report but no income-based minimum tax.

If your LLC operates primarily in a state with a minimum tax, forming it elsewhere will not usually eliminate your obligation to pay your home state’s fees.

Frequently Asked Questions

1. What is the LLC minimum tax?

It’s a state-mandated annual fee or franchise tax, often due regardless of profit or business activity.

2. Does every state have an LLC minimum tax?

No. Some states, like Wyoming and Nevada, have no minimum tax, only small filing fees.

3. Is the California $800 fee the same as income tax?

No. It’s a flat franchise tax separate from income taxes and applies even with no income.

4. Can I avoid the LLC minimum tax by forming in another state?

Not if you do business in your home state—you’ll still need to register as a foreign LLC and pay local fees.

5. Does electing S corp status eliminate the minimum tax?

No. Tax classification changes federal and state income tax treatment but not the obligation to pay a state’s minimum fee.

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