California - How to avoid back-to-back $800 California franchise tax

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How to avoid back-to-back
$800 California LLC franchise tax

How to form an LLC in California
This Quick Start Guide is a brief overview of how to form an LLC in California.

Detailed Lessons:

 

California LLC Costs:
California state fee: $70
Statement of information: $20 (every two years)
Annual franchise tax: $800 (every year)

Need help?
Hire a reliable service to form your California LLC:
Northwest ($39 + state fee) or LegalZoom ($149 + state fee)

(check out Northwest vs LegalZoom)

At LLC University®, not only do we empower entrepreneurs with free education, we also help them save money.

We’re going to show you how to avoid back-to-back $800 franchise tax ($1,600 total).

The basics:

All California LLC’s, regardless of their revenue or business activity, must pay an $800 Annual Franchise Tax every year.

And lets get this out of the way before we begin:

This article isn’t about how to avoid Annual Franchise Tax for California LLCs. In fact, you can’t avoid the Annual Franchise Tax in California. If you don’t pay this tax, the CA Franchise Tax Board will impose penalties and fines. See section 17942 of the Revenue & Tax Code, FTB penalty chart, and FTB penalties and fees.

Furthermore, if you think forming your LLC out of state is going to help you, you’re in for a surprise. If you’re doing business in California, which includes something as simple as making a phone call, then you owe this Annual Franchise Tax even if you form your LLC out of state. Worse, you’ll then be required to register your out-of-state LLC as a foreign LLC in California, effectively doubling your LLC filing fees as well as annual report fees. Point being, form your LLC in California and pay their fees. It’s the cost of doing business in California.

Okay, back to the article: so how do you avoid the “back-to-back” Annual Franchise Tax?

We first have to figure out when your 1st and 2nd payments are due. The state’s terminology sounds like a riddle.

(the 3rd payment and every year going forward is easy to understand)

The instructions on Form 3522 (Limited Liability Company Tax Voucher) say:

Your first LLC annual franchise tax payment is due the 15th day of the 4th month after your California LLC is approved. The succeeding annual franchise tax payments are then due by April 15th every year.

That language is confusing. It sounds like the $800 is due 4.5 months after your LLC is approved. However, the $800 is actually due 3.5 months after your LLC is approved.

Here’s how it works:

As an example, if your California LLC was approved in November (on any day) of 2020, November is counted as “month 1”. So the “4th month” after that is February of 2021 (not March, which is what most people think). And the 15th day would make your first $800 payment due by February 15th, 2021.

And although your LLC existed for only 2 months in 2020 (November – December), it is considered to have existed for the entire taxable year (all 12 months of 2020).

This means your LLC has to pay the entire $800 franchise tax for the year 2020. An no, unfortunately, California doesn’t let you prorate it.

So your first $800 payment is due by February 15th 2021. We’ve established that.

Here’s where things get worse:

Your 2nd $800 payment is due just 2 short months ahead, by April 15th, 2021 (this is the payment for the 2021 tax year).

Within a 60-day period, you’re required to pay the state $1,600.

How to avoid paying $1,600 franchise tax (use a future file date)

The best way to avoid paying back-to-back $800 franchise tax is to not let your California LLC go into existence at the end of the year.

For example, if you’re forming your LLC later in the year (October, November, or December), and you don’t need your LLC open right away, you can use a future file date and make your LLC effective January of the following year.

This way, you’ll only need to make a single $800 payment. If you’re LLC goes into existence in January, January is “month 1”, and the payment is due by April 15th.

How to use a Future File Date for your California LLC

Most states refer to this as your LLC effective date, however, California used the term “future file date”. They both mean the same thing.

There are 3 ways to use a future file date. It depends on how you’re forming your LLC:

1. If you’re forming your LLC online, you’ll see a “File Date” section. This is where you’d select January. Note, the date can’t be more than 90 days ahead.

2. If you’re forming your LLC by mail, there are two methods:

a. wait until January to file (or the 2nd half of December because of the “15-day rule”)

b. use a Future File Date Attachment and include it with your Articles of Organization

The 15-day rule: California has a 15-day rule. If your LLC goes into existence in the last 15 days of December, it’s considered to not exist for that taxable year and therefore you don’t owe an $800 for those 15 days.

If you find information online stating that you can forward your California LLC filing via the Mail Submission Cover Sheet (the first page in Articles of Organization), that is incorrect.

LLC University® recommendation

We recommend the online filing as it’s easier to complete and the approval time is slightly faster.

We have instructions for both the online filing and the mail filing here: California LLC filing instructions.

In Summary

If you’re thinking of forming a California LLC at the end of the year, and you don’t need your LLC open right away, we recommend forward dating your LLC to January 1st of the following year.

Or you can also just wait until January to form your LLC.

Either way, you’ll save $800.

Matt Horwitz
Founder & Educator, LLC University®
Forming an LLC shouldn't be so complicated. Our step-by-step guide will make the process a breeze – and no complex legal jargon! LLC University® teaches people how to form an LLC for free in all 50 states. We hope you find our free guides and resources helpful in your business journey.
Disclaimer: Nothing on this page shall be interpreted as legal or tax advice. Rules and regulations vary by location. They also change over time and are specific to your situation. Furthermore, this comment section is provided so people can share their thoughts and experience. Please consult a licensed professional if you have legal or tax questions.

4 Comments

  1. Mike January 3, 2019

    Hi,

    So I formed my LLC in March of 2018…so I’m screwed and have to pay the $800 regardless…but what if I want to avoid paying it again for 2019? Am I too late since it’s already Jan 2019? I’m in the process of closing my business, will I still have to pay the $800 again in April of 2019? Or is there anything I can do? Thank you!!

    reply
    • Matt Horwitz January 6, 2019

      Hi Mike, you do owe franchise tax and a return for 2018. If the dissolution is filed (and received) by January 15th, you won’t owe franchise tax for 2019. Hope that helps.

      reply
  2. Abhisekh Sharma June 30, 2019

    we opened an LLC partnership(2 members) in January 2019. we filed the tax (min 800) within 3 months of formation.

    after filing tax of 800, one member left LLC and now its sole properitorship .Just to update IRS we only sent form 8882-B.

    They sent us a notice that they received form 8822-B
    Do we need to pay 800$ for this year(2019) again since our LLC got changed from partnership to sole properitership.

    reply
    • Matt Horwitz July 6, 2019

      Hi Abhisekh, the IRS has nothing to do with the California $800 Annual Franchise Tax. This tax is a state tax imposed by California on LLCs for the privilege of doing business in the state. The fact that one of your Members has left does not stop your LLC’s obligation to pay the Annual Franchise Tax. Additionally, 8822-B is an IRS form used to change the address of an LLC or the EIN Responsible Party. It doesn’t change the tax classification of the LLC. In order to update the IRS about the change in tax classification (going from an LLC taxed as a Partnership to an LLC taxed as a Sole Proprietorship), you need to file Form 8832. And your California LLC needs to meet all its tax filing obligations in California, regardless of how many Members there are and regardless of how much revenue it makes. Hope that helps.

      reply

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