How Is an LLC Taxed in California? A Full Breakdown

A Limited Liability Company (LLC) offers its owners protection from business liabilities, a feature that makes it a popular structure for new ventures. When operating in California, an LLC enters a distinct tax environment, with multiple state obligations that are separate from and in addition to federal tax rules.

Federal Tax Classification Choices for an LLC

An LLC’s tax obligations are based on its federal tax classification with the Internal Revenue Service (IRS). By default, the IRS treats a single-member LLC (SMLLC) as a “disregarded entity.” All business income and expenses are reported directly on the owner’s personal tax return, typically using Schedule C. The LLC’s net profit is subject to both regular income tax and self-employment taxes.

For an LLC with two or more members, the default federal classification is a partnership. The LLC files an informational return, Form 1065, and the profits and losses are “passed through” to the individual members. Each member receives a Schedule K-1, which details their share of the LLC’s financial results, and they report this information on their personal tax returns.

An LLC has the flexibility to elect a different tax status. It can file Form 2553 to be taxed as an S Corporation. The owner-employee must be paid a “reasonable salary,” on which payroll taxes are paid. Any remaining profits can be distributed to the owner as dividends, which are not subject to self-employment taxes.

An LLC may also choose to be taxed as a C Corporation by filing Form 8832. Under this structure, the LLC pays corporate income tax on its profits at the federal corporate rate. This choice can lead to “double taxation,” where the corporation pays tax on its earnings, and if those after-tax profits are distributed to owners as dividends, the owners pay personal income tax on that income.

California’s Core LLC Entity-Level Taxes

Nearly every LLC doing business in California is subject to an annual $800 franchise tax paid to the California Franchise Tax Board (FTB). For a newly formed LLC, the first payment is due by the 15th day of the fourth month after its official registration. For subsequent years, the payment is due by April 15th for calendar-year filers and is submitted with Form 3522.

This tax is required even if the LLC is not profitable or is inactive. The only general exception is for LLCs that formally cancel their registration within their first year and have not conducted any business. Failure to pay this tax on time can lead to penalties and interest, and could result in the LLC losing its good standing with the state.

In addition to the franchise tax, California imposes a separate LLC fee based on the LLC’s “total California income,” which is gross income from all sources attributable to the state. This fee applies to LLCs with total California income of $250,000 or more.

The LLC fee schedule is progressive. The fee is calculated and reported on Form 568, the “LLC Return of Income,” and is paid in addition to the $800 franchise tax. The fee amounts are 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.

California State Income Tax Obligations

The method for taxing an LLC’s profits in California is tied to the federal tax classification the business has chosen. For LLCs treated as disregarded entities or partnerships, the LLC itself does not pay California income tax on its net income, as profits and losses are passed through to the members.

If an LLC elects to be taxed as an S Corporation, California imposes a 1.5% tax on the LLC’s net income, which is paid at the entity level. The remaining profits are then passed through to the members.

In all pass-through scenarios, members are responsible for reporting their share of the LLC’s income on their personal California tax returns, such as Form 540. The income is taxed at the individual’s state income tax rate, which can range from 1% to 13.3%. The LLC must still file an annual informational return with the state using Form 568, which reports the allocation of income and deductions to its members.

If an LLC has elected to be taxed as a C Corporation, it is also treated as a C Corporation by California. The LLC entity is responsible for paying state corporate income tax on its net income at a flat rate of 8.84%. This tax is calculated and paid with Form 100, the “California Corporation Franchise or Income Tax Return.”

This structure introduces the potential for double taxation at the state level, mirroring the federal system. After the corporation pays the 8.84% tax, any dividends distributed to members must be reported on their personal California tax returns. This dividend income is then taxed again at their individual state income tax rates.

Other Potential California Business Taxes

LLCs in California may be responsible for other taxes depending on their specific business activities. If an LLC sells tangible personal property, it must collect and remit sales tax, which requires registering for a seller’s permit with the California Department of Tax and Fee Administration (CDTFA). Rates vary by location due to district taxes.

For LLCs with employees, payroll tax obligations are a consideration. These businesses must register as employers with the Employment Development Department (EDD). Responsibilities include withholding state income tax from employee wages and remitting State Disability Insurance (SDI). The LLC is also responsible for paying employer-funded taxes like Unemployment Insurance (UI) and Employment Training Tax (ETT).

Business owners should also be aware of potential local taxes. Many cities and counties in California impose their own business taxes, which are often based on gross receipts or the number of employees. It is important for LLC owners to contact their local city or county office to understand and comply with any local obligations.

Annual Filing Requirements and Due Dates

The primary state tax return for all LLCs is Form 568, the “LLC Return of Income.” This form is used to report income, calculate the LLC fee, and show the distribution of income to members. For an LLC owned by individuals, the return is due by April 15th for calendar-year filers. If the LLC is owned by a pass-through entity, the due date is March 15th.

The annual franchise tax payment is made using Form 3522 and is due by April 15th for most existing businesses. The LLC fee, which is calculated on Form 568, is also due by the original filing deadline of the return.

If an LLC is taxed as a C Corporation, it files Form 100, the “California Corporation Franchise or Income Tax Return,” which is due by the 15th day of the 4th month after the close of the tax year. The Franchise Tax Board (FTB) offers several methods for paying these taxes, including FTB Web Pay for electronic payments, mail, or electronic funds transfer (EFT).