What Is the $800 Minimum Franchise Tax?

The $800 minimum franchise tax is a recurring fee levied by California on registered business entities for the privilege of conducting business in the state. This tax is due annually and is not based on a business’s income, profits, or level of activity. It is a flat amount that must be paid simply because the business is formally registered with the California Secretary of State.

This tax applies even if the company is dormant, operates at a loss, or is only in existence for a portion of the year. The fee is the cost for the legal protections and benefits, such as liability protection, that the state grants to a registered business.

Entities Subject to the Minimum Franchise Tax

The requirement to pay the annual $800 minimum franchise tax extends to several types of formal business structures registered in California. Limited Liability Companies (LLCs), C Corporations, and S Corporations are the most common entities subject to this tax. Every corporation incorporated or registered to do business in the state must pay this minimum amount, regardless of whether it is a domestic entity or a foreign entity.

The tax also applies to Limited Partnerships (LPs) and Limited Liability Partnerships (LLPs). These partnership structures, which offer liability protection to their partners, are also liable for the annual payment. The tax is assessed per registered entity, meaning a business owner with multiple LLCs or corporations is responsible for the $800 tax for each one.

Conversely, sole proprietorships and general partnerships are not subject to the minimum franchise tax. Because they are not formally registered as separate legal entities, their business income is reported directly on the owners’ personal tax returns.

First-Year Exemptions and Special Rules

Specific rules apply to a business’s first year of operation, creating important distinctions between entity types. Newly formed or qualified C Corporations and S Corporations benefit from a first-year exemption. These corporations are not required to pay the $800 minimum franchise tax during their initial taxable year to ease the financial burden as they get established.

Despite this exemption from the minimum tax, corporations are not entirely free from tax obligations in their first year. If a new S Corporation or C Corporation generates net income, it will still owe tax calculated on that income. For S Corporations, the rate is 1.5% of net income, while for C Corporations, the rate is 8.84%. If the calculated tax on net income is less than $800, they pay the smaller amount.

This first-year exemption does not extend to all business types. Limited Liability Companies (LLCs), Limited Partnerships (LPs), and Limited Liability Partnerships (LLPs) are required to pay the $800 minimum franchise tax in their very first year of business. A temporary relief measure for LLCs formed between January 1, 2021, and December 31, 2023, which waived their first-year tax, has since expired.

A minor exception, known as the 15-day rule, applies to all these entities. If a business is formed in the last 15 days of its taxable year and does not conduct any business during that period, it is not required to pay the minimum franchise tax for that initial partial year.

Payment Deadlines and Procedures

The timing for paying the $800 minimum franchise tax varies depending on the business structure, with deadlines falling in the third or fourth month of the taxable year. For S Corporations, Limited Partnerships (LPs), Limited Liability Partnerships (LLPs), and LLCs taxed as partnerships, the payment is due by the 15th day of the 3rd month of their taxable year. For businesses using a standard calendar year, this deadline is March 15th.

For C Corporations and single-member LLCs, the payment is due by the 15th day of the 4th month of the taxable year, which is typically April 15th. For a newly formed LLC, the first-year’s payment is also due by the 15th day of the 4th month after the business is filed with the Secretary of State.

Payments can be made through several channels provided by the California Franchise Tax Board (FTB). Businesses can mail a check with the appropriate payment voucher, such as Form FTB 3522 for LLCs or Form FTB 3539 for corporations. Another method is to pay online using the FTB’s Web Pay system.

It is important to note that an extension to file a tax return is not an extension to pay the tax. The $800 minimum franchise tax must be paid by the original due date to avoid penalties and interest, even if the business files for an extension for its overall income tax return.

Tax Treatment and Inactive Businesses

The $800 minimum franchise tax payment has direct implications for a business’s federal tax filings. This payment is considered a state tax paid for the purpose of carrying on a trade or business and is typically deductible as a business expense on the company’s federal income tax return. This deduction helps to offset the cost of the tax by reducing the business’s overall federal taxable income.

A common misconception is that a business that is inactive or not generating revenue is exempt from the tax. The franchise tax is levied for the privilege of being a registered entity in California, not for the actual transaction of business. As long as a business entity is officially registered with the California Secretary of State, it owes the $800 minimum tax each year, regardless of its operational status.

The only way to stop the annual accrual of this tax liability is to formally dissolve the business. This involves filing the appropriate dissolution or cancellation paperwork with the California Secretary of State, such as a Certificate of Dissolution for a corporation or a Certificate of Cancellation for an LLC. The business must also file a final tax return with the Franchise Tax Board and settle any outstanding tax balances.