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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.
California LLC Costs:
California state fee: $70
Statement of information: $20 (every two years)
Annual franchise tax: $800 (every year)
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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).
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, their penalty chart, and their penalty information. 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)
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.
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.
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.
Is my LLC doing business in California
Chapter 10.6. – Tax and Fees on Limited Liability Companies
Subdivision (d) of Section 23153, California Revenue and Tax Code
Subdivision (a) of Section 17941, California Revenue and Tax Code