Doing Business as an LLC in California
If your California LLC engages in any business activities within the state—even for a single day during the year—you’re required to meet the state’s tax obligations. An LLC is considered to be “doing business” in California if it:
- Is incorporated or commercially based in California.
- Exceeds total sales of $636,446 or 25% of its overall sales within California, including those made through agents or contractors.
- Holds real property or tangible assets in California valued at over $63,644 or 25% of its total tangible assets.
- Pays compensation in California exceeding $63,644 or 25% of its total compensation.
By meeting any of these criteria, your LLC is subject to California’s franchise tax and other tax requirements.
California Franchise Tax Exemption
In 2020, California introduced legislation granting certain LLCs, limited partnerships (LPs), and limited liability partnerships (LLPs) an exemption from the annual franchise tax during their first taxable year. This exemption applies to entities formed between January 1, 2021, and December 31, 2023. Starting in the second taxable year, these businesses must pay the $800 annual franchise tax. For more details, consult California Assembly Bill 85 or speak with a legal expert.
California LLC Annual Franchise Tax
Every LLC operating in California is required to pay an annual franchise tax of $800, regardless of its income or activity level. Key points to note:
- Deadline: The tax is due by the 15th day of the fourth month after the start of the tax year.
- Payment Form: Use Form 3522 (California LLC Tax Voucher) to make your payment. Payments can be submitted by mail or online, though online payments incur a 2.3% convenience fee.
- Penalties: Late payments result in penalties and interest, so timely filing is critical.
California LLC Fee
In addition to the franchise tax, California imposes an annual LLC fee based on the LLC’s total annual income:
| Income Range | Annual Fee |
| $250,000 to $499,999 | $900 |
| $500,000 to $999,999 | $2,500 |
| $1,000,000 to $4,999,999 | $6,000 |
| $5,000,000 or more | $11,790 |
LLCs must estimate and pay this fee using Form 3536 (Estimated Fee for LLCs) by the 15th day of the sixth month of the taxable year. Failure to pay on time may result in a 10% penalty on the unpaid amount.
Filing Form 568: LLC Return of Income
Every year, California LLCs must file Form 568 (LLC Return of Income) to report their income, taxes, and fees. While no payments are made with this form, it provides a comprehensive overview of the LLC’s financial activity. Form 568 includes details such as:
- Total LLC income
- Franchise tax and LLC fees
- Member shares of income, deductions, and credits
- Overpayments from prior years
- Tax credits and deductions
- LLC assets and liabilities
- Ownership of additional businesses
The filing deadline is typically April 15th, aligning with individual tax returns.
Frequently Asked Questions
How Are LLCs Taxed in California?
LLCs in California are subject to:
- Annual Franchise Tax: $800 per year, payable until the LLC is officially dissolved.
- LLC Fee: Based on annual gross income, as outlined above.
- Federal Taxation: By default, LLCs are taxed as partnerships or disregarded entities, though they may elect S-Corp or C-Corp tax status.
How Are California LLCs Taxed as S-Corps?
Electing S-Corp status can provide tax advantages for certain LLCs by allowing members to receive distributions not subject to self-employment tax. To qualify:
- File IRS Form 2553 to elect S-Corp status.
- Meet IRS requirements, including shareholder limits and residency rules.
Consult with a CPA to evaluate whether S-Corp status benefits your LLC.
How Are California LLCs Taxed as C-Corps?
LLCs taxed as C-Corps face “double taxation”:
- Corporate Income Tax: Federal rate of 21% and California rate of 8.84%.
- Shareholder Taxes: Dividends are taxed at the individual level.
Despite this, C-Corp status can attract investors and provide access to additional tax benefits. Consult with a tax professional to weigh the pros and cons.
Do LLCs Pay Income Tax in California?
Yes. LLCs must pay both the annual franchise tax and LLC fee based on gross receipts. These taxes apply even if the LLC has no profits or minimal activity.
Is the $800 Franchise Tax Waived in the First Year?
Yes, for LLCs formed between January 1, 2021, and December 31, 2023. The $800 franchise tax is waived during the first taxable year but applies starting in the second year.
Do Foreign LLCs in California Need to Pay Taxes?
Yes. Foreign LLCs operating in California must:
- Register with the California Secretary of State.
- Pay the $800 annual franchise tax and any applicable LLC fees.
What Expenses Are Tax-Deductible for an LLC?
LLCs can deduct legitimate business expenses to reduce taxable income, including:
- Startup costs
- Office rent and utilities
- Employee salaries and benefits
- Advertising and marketing expenses
- Software and subscriptions
- Legal and professional fees
How Can an LLC Avoid Property Tax Reassessment in California?
To avoid reassessment, ensure the proportional ownership of the LLC and the individuals involved remains the same. For instance, transferring property jointly owned by individuals to an LLC with identical ownership shares will not trigger reassessment.
Partner with Next Era Legal
Navigating California’s LLC tax requirements can be complex, but you don’t have to do it alone. At Next Era Legal, we provide efficient, technology-driven solutions to ensure compliance and minimize your tax burden. Whether you’re forming a new LLC or managing an existing one, our team is here to help.
Ready to Simplify Your LLC Taxes?
Contact Next Era Legal today to schedule a consultation. Our expert team is ready to provide tailored guidance for your California LLC. Click the “Schedule a Call” button or submit a contact form to get started.
Disclaimer
All information provided is for educational purposes only, does not constitute legal or tax advice, and does not establish an attorney-client relationship.
