How to Pay California Franchise Tax and Avoid Penalties

Businesses operating in California must pay a franchise tax to fund state services and infrastructure. Missing deadlines can result in penalties, interest charges, and suspension of business operations. Understanding how to calculate and submit this tax is essential for avoiding financial burdens.

Who Must Pay

California requires most business entities to pay a franchise tax, even if they generate no income. This applies to corporations, limited liability companies (LLCs), limited partnerships (LPs), and limited liability partnerships (LLPs) registered with the California Secretary of State. Inactive businesses or those operating at a loss must still pay as long as they remain registered.

Corporations, including C and S corporations, owe the tax if they are incorporated, registered, or conducting business in California. While S corporations pass income through to shareholders for federal tax purposes, they still owe a minimum franchise tax at the state level. LLCs classified as partnerships or disregarded entities are also subject to the tax, though their payment structure differs. General partnerships and sole proprietorships are exempt unless they have opted for a taxable business structure.

Out-of-state businesses with California operations must comply as well. If a foreign corporation or LLC conducts business in California, even without a physical presence, it may still be liable based on sales, payroll, and property within the state. Companies exceeding economic thresholds—such as $690,144 in California sales for 2024—must pay the tax even without formal registration.

Determining the Amount

The amount owed depends on the business entity type, income level, and applicable tax rates. Corporations pay either a percentage of net income or a fixed minimum, whichever is higher. The standard corporate tax rate in California is 8.84% of net income, while S corporations pay 1.5%. Both must pay at least $800 annually, regardless of profitability.

LLCs are taxed differently, paying an annual fee based on total California revenue rather than net income. The base franchise tax is $800, with additional fees for higher revenue. In 2024, an LLC earning between $250,000 and $499,999 owes an extra $900, while one earning between $500,000 and $999,999 pays an additional $2,500. These fees scale up, with businesses earning $5 million or more paying an extra $11,790.

Limited partnerships and limited liability partnerships pay only the $800 minimum tax, without additional revenue-based fees. Businesses operating in multiple states must consider California’s apportionment rules, which use a single-sales factor formula to determine taxable income. Only the percentage of total sales occurring in California is used to calculate tax obligations.

Payment Methods

California businesses can submit franchise tax payments through multiple methods. The Franchise Tax Board’s (FTB) online payment system, Web Pay, allows businesses to electronically transfer funds directly from a bank account. This method is free, secure, and provides immediate confirmation. Businesses can also schedule future payments to avoid missing deadlines.

Payments can also be made by check or money order, mailed to the FTB with the appropriate tax voucher. The payment should include the company’s entity number and tax year for proper processing. Since postal delays can result in late fees, businesses should mail payments well before the due date and consider using certified mail for proof of submission.

Businesses with higher tax liabilities may need to make estimated quarterly payments. Corporations owing more than $800 in franchise tax must follow the estimated tax schedule, with payments due on the 15th day of the fourth, sixth, ninth, and twelfth months of the fiscal year. Missing an installment or underpaying can lead to penalties, so accurate forecasting is important.

Consequences of Non-Payment

Failing to pay California franchise tax on time results in a 5% late penalty on the unpaid amount, plus an additional 0.5% for each month the balance remains unpaid, up to a maximum of 25%. Interest also accrues daily at the federal short-term rate plus 3%.

Beyond financial penalties, non-payment can lead to suspension or forfeiture of a business entity by the FTB. A suspended or forfeited business loses legal rights, including the ability to enter contracts, file lawsuits, or defend against legal claims. The company’s name also becomes available for other entities to claim, creating potential brand identity issues. If a suspended business continues operating, its contracts may be deemed voidable, meaning clients and vendors could refuse payment or enforcement in court.

Adjustments After Payment

Businesses may need to adjust franchise tax payments due to overpayments, miscalculations, or financial changes. The FTB provides options for correcting errors, requesting refunds, or applying credits toward future tax obligations.

Refunds and credits are available when a business overpays its franchise tax. If the amount paid exceeds the actual liability, businesses can request a refund by filing Form 3567, “Request for Taxpayer Assistance.” Alternatively, overpayments can be applied as a credit toward future tax years.

Corrections to previously filed returns can be made using Form 100X for corporations or Form 568 for LLCs. If an adjustment results in additional tax owed, prompt payment is necessary to avoid penalties and interest. Businesses disputing an FTB assessment can file a protest or appeal within 60 days of receiving a notice. Supporting documentation, such as financial statements or tax records, is essential when challenging an assessment.