The following information is provided for educational purposes only and in no way constitutes legal, tax, or financial advice. For legal, tax, or financial advice specific to your business needs, we encourage you to consult with a licensed attorney and/or CPA in your State. The following information is copyright protected. No part of this lesson may be redistributed, copied, modified or adapted without prior written consent of the author. California has a number of ongoing requirements for your LLC to remain in compliance with the State. The first of these is the Statement of Information which we discussed in a prior lesson. Remember your first Statement of Information is due within 90 days of the approval of your LLC. Then, you’ll need to file it again every two years. It will be due by the anniversary date of the approval of your LLC. If you have not watched this lesson yet, please do so now. The next requirement is the Annual LLC Franchise Tax of $800. California charges an $800 Annual LLC Franchise Tax on LLCs. This tax is due by all LLCs regardless of income or the business activity. This is a “prepay tax”, meaning that it pays for the current year. Your first $800 payment for the LLC Franchise Tax is due by 15th day of the 4th month after your LLC is filed. The month your LLC is filed counts as Month 1, regardless if you file on the 1st of the month, the last of the month, or any day of the month, really. This means that if you were to file your LLC on March 22nd, then you must pay the $800 fee no later than June 15th (in this example, March is Month 1, April is Month 2, May is Month 3, and June is Month 4). Then, every year after your first payment $800 LLC Franchise Tax will be due by April 15th. You pay the $800 LLC Franchise Tax using Form 3522 called the LLC Tax Voucher. We’ve included this form below in the download section, so that you can see it and get familiar with it. Failure to file before the deadline will result in the State charging late fees and penalties, and they will eventually dissolve your LLC if you do not pay the $800 Annual LLC Franchise Tax. This is not a popular requirement for California, but it is mandatory and it is the cost of doing business in the State. There’s no way to get around this tax. If you want to form an LLC in California, you have to pay this $800 tax within 4 months after you file your LLC and then again by April 15th of each year. Next is Form 3536, the Estimated Fee for LLCs. In addition to filing and paying the $800 Annual LLC Franchise Tax, you’ll also have to file a return called Form 3536, Estimated Fee for LLCs, and pay an additional fee only if your LLC will make $250,000 or more during the tax year. The more you make, the higher the fee. For example, again if you’re under $250,000 you don’t have to pay this additional fee, but if you’re between $250,000 – $500,000, the fee is $900. Between $500,000 and a million it’s $2,500, etcetera as you can look at the table there. Again, the fees above are in addition to the $800 Annual LLC Franchise Tax, and again you’ll only have to worry about this fee if you make over $250,000 during the tax year. Form 3536, again the Estimated Fee for LLCs must be filed and paid by the 15th day of the 6th month after your LLC is filed. Then, every year after your first payment, Form 3536 will be due by June 15th. If you make less than $250,000, again, you do not have to file form 3536. You’ll be able to download Form 3536 below this video, but we’re going to recommend that you get help with this as it’s quite complicated. We’ll cover more on this in just a minute. Next, Form 568, LLC Return of Income. In addition to paying the $800 Annual LLC Franchise Tax with Form 3522 (due by all LLCs) and filing and paying the Estimated Fee (for only LLCs with income over $250,000), all LLCs also need to file what’s called an LLC Return of Income, Form 568. Form 568 pays taxes on previous year’s income, just like regular federal taxes. Again, Form 568 is filed by all LLCs regardless of income. Form 568 is due by the 15th day of the 4th month after the end of your taxable year. This will most likely be April 15th if you run your tax year January to December (which a 99%of our members do). Think of Form 568 as a summary of all the LLC’s financial activity during a given tax year. The purpose of filing form 568 is to: report the Estimated Fee for your LLC, report the $800 Annual Franchise Tax, report and pay taxes for any members who are not California residents, report income, deductions, gains, losses cost of goods sold, salaries, and more. We’re also going to recommend that you get help from an accountant with Form 568 as this one is definitely confusing. It’s 7 pages long. Other Tax Requirements and Recommendations. Depending on your LLC’s income, how many members your LLC has, whether or not you have employees, what state the members are a resident of, and what type of business you have, you most likely need to file additional forms (besides what we have already mentioned), and you may also have to pay additional taxes to the state. Such tax documents might be a Schedule K-1, a Schedule EO, a Schedule D, and other documents. Calculating your LLC’s taxes can be complicated and if done improperly can negatively impact your LLC. We strongly recommend that you hire an accountant. Again, California taxes are very complicated. Hiring a tax professional will not only help keep your LLC in compliance with the State, but it will also give you an advisor to go to further business questions. Whether your business turns a profit or loses money, you still need to file tax documents every year. This is not something to be taken lightly. If you want to run a serious business and not get into trouble with the State, you should get assistance in filing your taxes properly. A referral from a friend or someone else you trust is usually the best way to find someone to do your taxes. You can also ask co-workers, acquaintances from local clubs or organizations, your neighbors and other business people. You can also ask your Twitter, Facebook, LinkedIn or other social media friends. It’s as easy as typing into your social media account, “Hey, I just form an LLC. Anyone know a good accountant?” If you can’t get a personal referral, then try doing a search online for “accountant” or “certified public accountant” and looking for someone with good reviews. Also, take a look below this video. We’ve included some good resources to help with your search. You should also want someone who’s a good fit for your company, makes you feel comfortable, and is willing to answer all of your questions. It should be someone you like personally as well as professionally. It’s okay to take your time to find the right person. We recommend talking with at least 2-3 people before making your final decision. A good thing to keep in mind is that these professionals are interested in your business. They’ll gladly give you 10-15 minutes (if not more) of their time, so don’t feel pressured to go with the first person that you talk to. And hey, if you really want to find a rock star tax professional, why not speak to 7 or 8 to make sure you really find the best one. We hope that you find a great tax professional. And that concludes this Lesson.
Form 3522: “Limited Liability Company Tax Voucher”
• Form 3522 is used to pay the $800 Annual Franchise Tax each year.
• Download Form 3522: FTB Forms page > Tax year: select the appropriate year > Taxpayer type: “Limited Liability Companies” > Form type: “Income Tax Forms” > click “Get forms” button. Look for Form 3522 and click the download link.
• All LLCs in California must file Form 3522 and pay the $800 Annual Franchise Tax every year, regardless of revenue or activity. Said another way, there’s no way to avoid this fee.
• The first $800 payment is due the “15th day of the 4th month” after your LLC is approved. We know that sounds like 4.5 months after your LLC is approved, but it’s actually 3.5 months. For example, if your California LLC is approved in November, November is counted as “month 1”, so 4 “months” after that is February. And the 15th day would be February 15th.
• So for example, if your LLC is approved in November of 2018, then your first $800 payment will be due by February 15th, 2019. This $800 is paying for the 2018 tax year since the LLC existed from November to December. Then, just two months later, you’ll owe another $800 payment, due by April 15th, 2019. This 2nd $800 payment is “going forward”, paying for the 2019 tax year. That’s two back-to-back payments totaling $1,600.
• We’ve mentioned our future file date attachment (that can be filed with your Articles of Organization) throughout our California LLC lessons, but we’ll mention it again here… just in case you’re reading this before you’ve formed your LLC. So the back-to-back payments come into play if your LLC is approved late in the year (October, November, or December). The trick to pushing that 2nd $800 payment ahead – again if forming your LLC late in the year – is to give your LLC a future file date of January 1st. You can also just wait until the last week in December or sometime in January to submit your Articles of Organization to the state. Please note, if using a future file date, it can’t be more than 90 days ahead.
• So it’s really the 1st and 2nd payments which can be a little tricky to figure out. In summary, the first $800 is due 3.5 months after your LLC is approved. The 2nd $800 is due on April 15th. Then anytime April 15th rolls around again, you’ll owe another $800.
Form 3536: “Estimated Fee for LLCs”
• Form 3536 is used to pay an Estimated Fee for your California LLC if it will make more than $250,000 in annual gross receipts (total revenue). If your LLC will not earn that much in annual gross receipts (total revenue), then you don’t need to file Form 3536.
• This fee is called “estimated” because you need to look over you LLC’s finances and see how much money has been made so far in the year. Then you need to forecast ahead and evaluate what your LLC’s annual gross receipts (total revenue) are likely to be.
• Download Form 3536: FTB Forms page > Tax year: select the appropriate year > Taxpayer type: “Limited Liability Companies” > Form type: “Income Tax Forms” > click “Get forms” button. Look for Form 3536 and click the download link.
• This is first due by the “15th day of the 6th month” after your LLC is approved. As we learned earlier, although that sounds like 6.5 months after your LLC is approved, it’s really 5.5 months after your LLC is approved. For example, if your California LLC is approved in May of 2018, then May is “month 1”. And 6.5 months after that is October. And the 15th day would make that October 15th, 2018.
• After that first due date, any future Estimated Fees must be paid and filed by June 15th each year.
Form 568: “Limited Liability Company Return of Income”
• All California LLCs must file Form 568, also known as a “Limited Liability Company Return of Income”.
• Form 568 is the state-level tax return for your LLC. And similar to your federal tax return with the IRS, which has “attachments” like forms and schedules, your LLC’s Form 568 will likely have California-specific schedules and forms attached to it as well.
• Download Form 568: FTB Forms page > Tax year: select the appropriate year > Taxpayer type: “Limited Liability Companies” > Form type: “Income Tax Forms” > click the “Get forms” button. Look for Form 568 and click the download link. Also download the “Booklet” for instructions and more details as well as any applicable 568 schedules.
• Depending on how your LLC is taxed by the IRS, Form 568 will typically be due by March 15th or April 15th each year. We strongly recommend working with an accountant to make sure you file your taxes properly.
Finding a California Accountant
We strongly encourage you to work with an accountant and/or a tax attorney after you form an LLC in California. It’s also a good idea to speak with a few accountants before your LLC is even formed.
You see, unlike most states, where an LLC’s annual report is filed with the Secretary of State (and it’s a typical “fill-in-the-blank-and-update-your-contact-info” form), your California LLC’s “annual reports” are essentially tax filings (franchise tax, estimated fee, tax on income, and more) paid to the state’s tax authority, the Franchise Tax Board. Said another way, they are far more complicated!
So not only will an accountant help you file your federal, state, and local returns properly, but they’ll be available to discuss tax strategies, such as if and when it makes sense to have your LLC taxed as an S-Corp, among other things.
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