California Franchise Tax for Foreign LLCs

A limited liability company (LLC) formed under the laws of another state is considered a “foreign” LLC in California, a designation based on its place of formation. California requires every LLC conducting business within the state, regardless of where it was formed, to pay an annual franchise tax. This tax is a requirement for maintaining good standing and legally operating in California. Understanding the triggers for this tax and the necessary compliance steps is important for any out-of-state business with connections to the California market.

Determining if Your LLC Owes the Franchise Tax

An LLC is subject to California’s franchise tax if it is organized in the state, registered with the California Secretary of State, or “doing business” in California. The state defines “doing business” broadly, and it is not limited to having a physical office or employees there. An LLC is considered to be doing business if it engages in any transaction for financial gain within California.

An LLC is also considered to be doing business if it is commercially domiciled in California, where its primary business decisions are made. Economic nexus is another factor, established when an LLC surpasses certain thresholds for economic activity, which are adjusted annually for inflation. For 2024, an LLC has economic nexus if its California sales exceed $735,019, its real and tangible personal property in the state exceeds $73,502, or its payroll compensation exceeds $73,502.

An LLC also meets the “doing business” criteria if its California sales, property, or payroll exceed 25% of its total for each category. These are independent criteria, and exceeding just one of the economic nexus or percentage-based thresholds is sufficient to establish tax liability.

Calculating the Franchise Tax and LLC Fee

Every foreign LLC doing business in California must pay an annual minimum franchise tax of $800. This flat tax is due regardless of whether the LLC generates income or operates at a loss. The payment is a prepaid tax for the upcoming taxable year.

In addition to the franchise tax, LLCs with total annual income from California of $250,000 or more are subject to a separate, tiered LLC fee. The fee amount increases as the LLC’s California-sourced income rises. The fee tiers are as follows:

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

“Total California income” for this fee is defined as gross income plus the cost of goods sold connected to the LLC’s business in the state. The calculation is based on total revenue, not net profit. This LLC fee is paid in addition to the $800 minimum franchise tax to remain compliant with the California Franchise Tax Board (FTB).

Registering a Foreign LLC in California

Before a foreign LLC can legally conduct business in California, it must register with the California Secretary of State. This is a one-time process done by filing an “Application to Register a Foreign Limited Liability Company” (Form LLC-5). This application qualifies the out-of-state LLC to operate within California.

To complete Form LLC-5, you will need the LLC’s exact legal name, its formation date, and its home state or country. This information must match a Certificate of Good Standing from the LLC’s home state, which must be issued within six months of filing and submitted with the application. The filing fee for this application is $70.

The application requires the street address of the LLC’s principal executive office, not a P.O. Box. You must also designate a registered agent for service of process with a physical street address in California. This agent, who can be an individual resident or a corporate agent, is responsible for receiving legal documents for the LLC. The form must be signed by an authorized person.

Filing and Payment Procedures

Once registered, the LLC has annual filing and payment requirements with the Franchise Tax Board (FTB). The $800 minimum franchise tax is paid using Form 3522, LLC Tax Voucher. For businesses on a calendar year, this payment is due by April 15th, the 15th day of the fourth month of the taxable year.

The annual LLC fee for LLCs with $250,000 or more in California-sourced income is handled separately. An estimated payment is due by the 15th day of the sixth month of the taxable year, generally June 15th, and is submitted with Form FTB 3536, Estimated Fee for LLCs. Both the tax and fee can be paid online via the FTB’s Web Pay system or by mail.

All LLCs must also file Form 568, Limited Liability Company Return of Income, annually. This form reports the LLC’s income and reconciles the final LLC fee calculation. The due date for Form 568 is the 15th day of the third or fourth month after the tax year closes, depending on the LLC’s classification. An automatic extension to file Form 568 is available, but it is not an extension to pay, and all payments are still due by their original deadlines.

Penalties for Non-Compliance

Failing to pay the $800 annual tax or the LLC fee by the due date results in penalties from the FTB. The penalty is 5% of the unpaid amount, plus 0.5% for each month the balance is unpaid, up to a 40-month maximum. Interest also accrues on any unpaid tax and penalties from the original due date.

A separate penalty applies for failing to file Form 568 on time, which is 5% of the unpaid tax for each month the return is late, up to a maximum of 25%. For LLCs taxed as partnerships, an additional penalty of $18 per partner per month for up to 12 months can be assessed. If the FTB issues a formal demand to file and the LLC fails to comply, a $2,000 penalty may be imposed.

Beyond FTB penalties, failing to register with the Secretary of State has legal consequences. A foreign LLC that is not registered in California cannot maintain a lawsuit in a state court. This means the business loses its right to sue or defend itself in legal actions within the state.