CA 565 vs 568: Differences for Partnerships and LLCs

In California, business entities such as partnerships and limited liability companies (LLCs) have specific state tax filing requirements. The primary documents for these entities are Form 565, the Partnership Return of Income, and Form 568, the Limited Liability Company Return of Income. While both forms report annual income and deductions to the state’s Franchise Tax Board, they are not interchangeable. The correct form depends on the legal structure of the business, and these distinct filing requirements carry different financial and administrative obligations.

Filing Requirements for Form 565 (Partnership Return)

Form 565 is the designated state income tax return for entities legally structured as partnerships. This includes general partnerships, limited partnerships (LPs), and limited liability partnerships (LLPs). These business structures are required to file Form 565 annually to report their financial activities, including income, deductions, and losses, to the California Franchise Tax Board.

The principle governing partnerships is pass-through taxation. This means the partnership entity itself does not pay income tax on its profits; instead, the net profit or loss is “passed through” to the individual partners. The partnership uses Form 565 to calculate earnings and then allocates the shares among the partners according to their agreement.

To facilitate this, the partnership prepares a Schedule K-1 (565) for each partner, detailing their specific share of tax items. Partners use this information to report the income or loss on their personal California income tax returns.

Filing Requirements for Form 568 (LLC Return)

The filing requirements for a Limited Liability Company (LLC) in California are centered around Form 568, but the form’s function depends on how the LLC is classified for tax purposes. An LLC’s tax status is a choice made by its owners, which dictates how it reports income and creates distinct filing scenarios that all use Form 568.

For a multi-member LLC, the default federal tax classification is that of a partnership. In this case, the LLC files Form 568 to report its income and expenses. Similar to a partnership, the LLC’s profit and loss are passed through to its members via a Schedule K-1 (568), which they use for their personal state tax return.

A single-member LLC (SMLLC) is classified as a “disregarded entity” for tax purposes, meaning its financial activity is reported directly on the owner’s personal tax return. Despite this, the SMLLC must still file Form 568 with the California Franchise Tax Board.

An LLC also has the option to be taxed as a corporation, either a C or S corporation. If an LLC elects corporate status, it will file a California corporation tax return—Form 100 or Form 100S. However, it must still file Form 568 to pay the mandatory annual LLC tax and fee.

Comparing Key Taxes and Fees

A primary financial consideration for both partnerships and LLCs in California is the annual tax. This is a minimum franchise tax of $800 levied on entities for the privilege of doing business in the state. This tax applies to LPs, LLPs, and all LLCs, making it a shared requirement. A notable exception is the general partnership, which is not subject to the $800 annual tax. For LLCs, this payment is remitted using Form 3522, the LLC Tax Voucher.

The most significant financial distinction between these entity types is the LLC Fee. This is an additional levy that applies only to LLCs and is calculated based on the LLC’s total California-sourced gross income. This fee does not apply to any partnership filing Form 565. The fee is tiered, meaning the amount owed increases as the LLC’s income crosses certain thresholds. The LLC Fee is structured as follows:

• $900 for income between $250,000 and $499,999.
• $2,500 for income between $500,000 and $999,999.
• $6,000 for income between $1,000,000 and $4,999,999.
• $11,790 for income of $5,000,000 or more.

This tiered fee structure introduces an administrative step for LLCs. They must estimate their total annual income and make a prepayment of the anticipated LLC Fee using Form 3536, Estimated Fee for LLCs. This requirement to estimate and prepay a fee based on gross income adds a financial obligation for LLCs that partnerships do not face. The combination of the annual tax and the LLC Fee can make operating as an LLC more costly than operating as a partnership in California.