What Is the California Annual Franchise Tax?

The California annual franchise tax is a payment required for the privilege of operating a business within the state. It is administered by the Franchise Tax Board (FTB) and applies to most formal business structures registered with the California Secretary of State. This tax is distinct from sales or payroll taxes and must be paid annually, even if the business is not active or operates at a loss.

Entities Subject to the Annual Franchise Tax

A company’s legal structure determines if it must pay the annual franchise tax. Formal entities registered with the California Secretary of State are subject to this tax, whether formed in California or registered to transact business from another state. This applies to C corporations, S corporations, Limited Liability Companies (LLCs), Limited Partnerships (LPs), and Limited Liability Partnerships (LLPs).

Sole proprietorships and general partnerships are not required to pay the annual franchise tax. Because these business types are not registered as formal entities with the state, their business income is reported on the owners’ personal tax returns. Tax-exempt nonprofit organizations may also be excused if they have received official exempt status from the FTB.

Calculating the Franchise Tax Amount

The $800 minimum franchise tax applies to nearly every liable business entity. For many businesses, especially those with low or no net income, the annual obligation will be exactly this amount.

Limited Liability Companies (LLCs), Limited Partnerships (LPs), and Limited Liability Partnerships (LLPs) are subject to the flat $800 minimum franchise tax annually. LLCs may also be liable for a separate LLC fee if their total annual revenue exceeds $250,000, but this fee is distinct from the franchise tax.

The calculation for corporations is more complex, as it depends on net income earned in California. C corporations must pay the greater of the $800 minimum tax or a tax of 8.84% on their California net income. For example, if a C corporation has a net income of $5,000, it would pay the $800 minimum, but if its net income were $15,000, the tax would be $1,326, so it would pay that higher amount.

S corporations face a similar calculation but with a different rate. They must pay the greater of the $800 minimum or 1.5% of their California net income. An S corporation with $40,000 in net income would pay the $800 minimum, but if it earned $60,000 in net income, its tax would be $900, and it would be required to pay that amount.

Payment Deadlines and Procedures

The deadline for paying the franchise tax depends on the business’s legal structure and fiscal year. For calendar-year filers, C corporations and LLCs must pay the tax by April 15th, while S corporations have an earlier deadline of March 15th. For a newly formed LLC, the first year’s annual tax is due by the 15th day of the fourth month after its registration with the Secretary of State.

Businesses have several options for submitting their franchise tax payments to the FTB. The most common electronic method is FTB Web Pay, which allows for direct debit from a bank account without a service fee. Payments can also be made by credit card, though this option involves a processing fee charged by a third-party vendor.

For those who prefer to pay by mail, the payment must be accompanied by a specific payment voucher. LLCs should use the LLC Tax Voucher, while corporations use the Payment for Automatic Extension for Corporations or Exempt Organizations. Mailing the payment without the correct voucher can lead to processing delays and potential penalties.

Key Tax Situations for Businesses

Newly formed or registered corporations are exempt from the $800 minimum franchise tax for their first taxable year, but they must still pay tax on any net income. This first-year exemption does not apply to LLCs, Limited Partnerships (LPs), or Limited Liability Partnerships (LLPs), which must pay the $800 tax for their first year.

To formally close a business, the owners must file the final franchise tax return and pay all outstanding taxes and fees. The FTB will then issue a tax clearance, which is required to officially dissolve the business with the California Secretary of State. Failure to complete this process means the entity continues to exist legally and will accrue the annual franchise tax liability each year.

If a business fails to file its tax returns or pay its franchise tax, the FTB will eventually issue a suspension. A suspended business loses its rights and privileges in California, meaning it cannot legally transact business, sell assets, or defend itself in court. To be reinstated, the business must file all delinquent returns and pay all past-due taxes, penalties, and interest.