What is the California Franchise Tax Board Fee?

If you own a business in California, it’s important to be aware of the state’s tax requirements, including the California franchise tax. This is a minimum $800 annual tax imposed on business entities registered with the state as well as out-of-state companies doing business in California. In this article, we’ll provide you with a guide to the California franchise tax board fee, including who must pay it, how to pay it, and how to reduce your tax burden.

What is the California Franchise Tax?

The California Franchise Tax is a tax levied on most business entities in California, including C corporations, S corporations, limited liability companies (LLCs), series LLCs, limited partnerships, limited liability partnerships, and limited liability limited partnerships. Charities and nonprofits can apply for an exemption from this tax.

The tax is due annually. The amount of the tax varies by business entity type, but it’s a minimum of $800 for all businesses that must pay it. The California Franchise Tax Board (FTB) is responsible for administering and collecting the tax.

Who must pay the California Franchise Tax Board fee?

The California Franchise Tax Board fee must be paid by all business entities that are doing business in California or have registered with the state’s Secretary of State to conduct business in California, regardless of where the business is headquartered or incorporated. This includes C corporations, S corporations, limited liability companies (LLCs), series LLCs, limited partnerships, limited liability partnerships, and limited liability limited partnerships. Nonprofits can apply for an exemption from this tax.

The fee is assessed on a yearly basis, and the amount owed is determined by the entity type and/or its income or net worth. In general, if an entity is doing business in California or registered to do so, it’s subject to the California Franchise Tax Board Fee.

Entity Requirements

Here are the requirements for each entity type:

Corporations: All corporations that are registered or doing business in California are required to pay the California Franchise Tax. This includes C corporations, S corporations, and foreign corporations.

Limited liability companies (LLCs) and series LLCs: All LLCs that are registered or doing business in California are required to pay the California Franchise Tax of $800. This includes single-member LLCs, multi-member LLCs, and foreign LLCs.

Additionally, LLCs making more than $250,000 in a year are also subject to an additional LLC fee, one that increases based on your LLC’s income. For example, if your LLC makes $250,000 to $499,999, it will pay a $900 LLC fee. LLCs making $500,000 to $999,999 pay $2,500; those making $1,000,000 to $4,999,999 pay $6,000; and those making $5,000,000 or more pay $11,790. LLCs have to estimate and pay this fee by the 15th day of the sixth month of the current tax year.

Limited partnerships, limited liability partnerships, and limited liability limited partnerships: These types of partnerships that are registered in or doing business in California are required to pay the California Franchise Tax at a flat rate of $800 annually.

General partnerships and sole proprietorships: Sole proprietorships and general partnerships aren’t considered separate legal entities and aren’t registered with the state, so they’re not required to pay the California Franchise Tax. Instead, the business income is reported on the owners’ personal income tax returns.

Nonprofits and charities: A nonprofit or charity may be able to avoid the franchise tax if it applies with the State of California for a tax exemption. It can do this by completing and submitting an Exemption Application (Form 3500) or a Submission of Exemption Request (Form 3500A).

It’s important to note that even if your business isn’t generating income, you’ll still be required to file a tax return and pay the minimum franchise tax of $800.

Are there exceptions to the California Franchise Tax Board fee?

Some entities may be exempt from paying the California Franchise Tax Board fee, such as certain types of nonprofit organizations, as we mentioned above. 

Also, to help new businesses during the COVID-19 crisis, California in 2020 passed a law that allowed LLCs to avoid paying the franchise tax in their first taxable year if they formed between January 1, 2021, and December 31, 2023.

How to Pay the Franchise Tax in California

The Franchise Tax in California can be paid online or by mail. To pay online, you will need to visit the California Franchise Tax Board’s website and follow the instructions provided. You can pay with a credit card or through an electronic funds transfer from your bank account.

To pay by mail, you will need to send a check or money order along with a payment voucher. The payment voucher can be found on the California Franchise Tax Board’s website.

The due date for paying the California Franchise Tax varies depending on your business entity type:

• For LLCs, series LLCs, and C corporations, the tax is due on the 15th day of the 4th month after the beginning of your tax year.
• For S corporations, limited partnerships, limited liability partnerships, and limited liability limited partnerships, the tax is due on the 15th day of the 3rd month after the close of the taxable year.

If the due date falls on a weekend or holiday, the deadline is moved to the next business day.

How to Reduce the California Franchise Tax Burden

With the exception of being a qualifying nonprofit, a general partnership, or a sole proprietor, you can’t really avoid the Caifornia Franchise Tax. And being a sole proprietor or general partner would mean you’d have no liability protection for your personal assets. Forming your business in another state won’t help because the franchise tax also applies to those doing business in California.

However, if you have an LLC and cancel it within one year of organizing, you can file a short form cancellation (SOS Form LLC-4/8) with the Secretary of State. Then, your LLC wouldn’t be responsible for the annual $800 franchise tax for its first tax year.

Also: if you have a corporation, you can avoid the minimum franchise tax if you didn’t conduct any business in California during your first year and your tax year was 15 or fewer days.

What are the penalties for not paying the tax?

If you fail to pay the California franchise tax board fee on time, you may be subject to penalties and interest charges. The penalties can be significant and can include late fees, interest charges, and even legal action.

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Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.