What Is the Annual California Franchise Tax?

The California annual franchise tax is exactly what it sounds like—a tax that the state's business owners must pay yearly. It is simply one of the costs of doing business if you choose to register your entity in California. The franchise tax is a special business tax required in California and about a dozen other U.S. states.

If your business is any of the types that offer limited liability—including limited liability company (LLC), S corporation, C corporation, limited partnerships (LP), or limited liability partnership (LLP)—it will be subject to the California annual franchise tax. Sole proprietorships, general partnerships, and tax-exempt nonprofits are not required to pay this tax.

How to pay the franchise tax in California

At the time of publication, the yearly California franchise tax is $800 for all noncorporate entities subject to the tax. For corporations, the $800 figure is the minimum franchise tax due. The state requires corporations to pay either $800 or the corporation's net income multiplied by its applicable corporate tax rate, whichever is larger. You may pay the tax online, by mail, or in person at the California Franchise Tax Board Field Offices.

The due date for the annual franchise tax depends on the type of business entity involved:

• For corporations, the minimum franchise tax is due the first quarter of each accounting period.
• For LLCs, the first-year annual franchise tax is due the 15th day of the fourth month from the date you file your business with the secretary of state.
• In subsequent years, the annual tax becomes due on the 15th day of the fourth month of your taxable year, which is generally April 15.
• LPs and LLPs face slightly different deadlines, with payments due on the 15th day of the taxable year's third month.

California annual franchise tax exemptions

Newly incorporated corporations are not required to pay the minimum franchise tax in their first year of operation. Further, businesses are not subject to the minimum tax if their tax year was 15 days or fewer and they did not conduct business during those days; the 15-day franchise tax exemption applies to LLCs as well as corporations.

Generally, however, the entity must pay a franchise tax whether the company is fully active, inactive, operating at a loss, or files a return for a period shorter than 12 months. This rule holds for all types of business entities subject to the franchise tax, making this business expense extremely difficult to escape.

While the above information provides a general overview of the California franchise tax, your best resource for complete information is the California Franchise Tax Board, the entity that levies and collects the tax. It has the most up-to-date information regarding the amount your business owes, amount of the minimum franchise tax, applicable deadlines, filing procedures, and any exemptions for which your business may qualify.