LLC Taxation California: Everything You Need to Know
LLC taxation California includes an annual franchise tax and an alternative minimum tax. Other taxes the state imposes are corporate income taxes.3 min read
LLC taxation California includes an annual franchise tax and an alternative minimum tax. Other taxes the state imposes are corporate income taxes. Your company may have to pay one or more of these taxes, based on your business structure and its income.
There are no tax benefits or consequences from forming an LLC, or limited liability company, since it doesn't change anything as far as federal taxes go. The IRS taxes single-owner LLCs like sole proprietorships and multi-member LLCs like partnerships. Although forming an LLC provides personal liability protection, it can also make you responsible for additional state taxes.
As pass-through entities, an LLC's profits and losses pass through the business to individual members, who then report the information on their personal tax returns. Similar to S corporations, LLCs don't pay income tax on the federal level. However, on the individual level, they pay federal and state taxes on the amount of income they receive.
You have some flexibility regarding how you distribute profits and losses. In an LLC, you choose the share that each owner receives. LLC owners pay self-employment taxes on their business income, and they may deduct losses on their tax return.
Franchise Tax and Other Fees
The annual franchise tax is a minimum of $800, and it applies to nearly all LLCs in the state, as well as foreign companies registered to conduct business in California. LLCs are responsible for this tax whether they make a profit or actually do business. The state charges standard LLCs a flat rate for the franchise tax, and the fee varies based on the total gross income.
The franchise tax applies to the following:
- S corporations
- Limited partnerships (LPs)
- Limited liability partnerships (LLPs)
- C corporations
Franchise taxes are due within 75 days of creating your LLC. These taxes are due every year, and the amount is higher if your business's income is more than $250,000. California doesn't prorate for a portion of the year, so even if an operating year is less than 365 days, the tax amount is still $800.
Some exceptions apply, such as the following:
- LLCs electing S corp tax status
- Certain businesses owned solely by deployed military members
- Nonprofits with tax exemption
- Certain short periods in a calendar year where there's no business activity
The state determines the amount of franchise tax on LLCs and corporations differently. For corporations, net revenues determine the amount, while an LLC's gross revenues are used.
The state imposes the LLC tax for the privilege of doing business in the state, and the total amount of taxes that California imposes is in addition to any federal taxes a company pays. The amount of the LLC tax and the LLC fee do not depend on company profits, which is in contrast to corporation taxation in the state.
In addition to the annual $800 tax, LLCs that have yearly gross revenues over $250,000 pay another yearly fee, based on business income in the state. This fee ranges from $900 to $11,790.
The amount breakdown is as follows:
- Income: $250,000 — $499,999 equals a tax of $900
- Income: $500,000 — $999,999 equals a tax of $2,500
- Income: $1,000,000 — $4,999,999 equals a tax of $6,000 tax
- income of $5,000,000 + equals a tax of $11,790
LLCs that elect to be taxed like corporations and traditional corporations are subject to a state income tax. Businesses that are subject to the corporate tax don't pay the franchise tax, but these businesses are subject to an alternative minimum tax.
You'll pay all state taxes and fees to the Franchise Tax Board (FTB).
Unlike some other states, California imposes some hefty fees, which is usually the cost of doing business there. While the annual fee in some states is as low as $100, California's fees start at $800. Residents of the state may be used to the cost of conducting business, but the high taxes may be a surprise for someone wishing to form a foreign company in California.
To find as many tax benefits and savings as you can, you might want to consult with a tax professional before and after starting an LLC.
If you need help with an LLC and its tax requirements, you can post your legal 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.