Limited liability companies (LLCs) offer attractive federal tax benefits, but LLCs operating in California must pay an $800 annual franchise tax as well as an LLC fee on gross receipts. This guide explains how California state tax on LLCs works, which exceptions apply, and how to pay.
California State Tax on LLCs
LLCs enjoy the tax benefits of pass-through taxation. Most LLCs pay no federal income tax. Instead, income and losses flow to the owners based on their interest in the LLC. The owners then pay tax based on their individual rates and other tax items. LLCs with a single owner doesn't even need to file a separate federal income tax return—the owner disregards the LLC and reports the LLC's income and deductions directly on their own return.
In contrast, C corporations must pay federal income tax at the corporate level while the owners must also pay tax on dividends and capital gains from the corporation—called double taxation. LLCs can file a special form to pay tax like a C corporation, but few choose to do so due to double taxation.
However, LLCs doing business in California must pay an $800 annual franchise tax.
An LLC does business in California if any of the following apply:
- The LLC executes a transaction within California for financial gain.
- The LLC is legally organized in California.
- 25% or more of the LLC's sales, property, or payroll comes from California.
- The LLC's California sales, property, and payroll exceed specific dollar amounts, which are updated by the California Franchise Tax Board (FTB) annually.
States cannot impose income tax—a tax based on net income—on out-of-state companies solely for selling goods to customers within the state. However, the annual franchise tax does not constitute a California income tax—the $800 applies regardless of the LLC's net income.
LLCs that did not conduct any business in California during a tax year of 15 days or less do not need to pay the franchise tax. LLCs have a calendar year tax year by default, so this exception usually applies to LLCs formed during the last 15 days of the year that haven't operated in California yet. Also, LLCs canceled within one year of organizing won't have to pay the franchise tax for their first year.
California LLC Fee
LLCs must pay an additional fee based on gross receipts from California—called California total income. The fee equals:
- $900 for LLCs with California total income between $250,000 and $499,999
- $2,500 for California total income between $500,000 and $999,999
- $6,000 for California total income between $1,000,000 and $4,999,999
- $11,790 for California total income over $5,000,000
LLCs with less than $250,000 of California total income do not pay an additional LLC fee.
The LLC fee does not qualify as a California income tax—the fee applies to gross receipts, not net income. Companies that merely sell goods to California customers remain subject to the fee.
An LLC that chooses to pay tax as a corporation does not have to pay the LLC fee. However, this election takes place at the federal level—an LLC can't choose pass-through taxation for federal income tax and corporate taxation for California state tax.
How to Pay the California State Tax on LLCs
LLCs file their tax return on Form 568, Limited Liability Company Return of Income, pay their $800 annual franchise tax using Form 3522, LLC Tax Voucher, and pay their LLC fee with Form 3536, Estimated Fee for LLCs.
LLC tax returns are due on the fifteenth day of the fourth month after the tax year. Unless the LLC elects a different fiscal year, this means April 15—the same day as individual tax returns.
The LLC must pay its $800 franchise tax on the fifteenth day of the fourth month of the current tax year—one year before the tax return's due date. The LLC must estimate and pay its LLC fee by the fifteenth day of the sixth month of the current tax year—two months after the $800 franchise tax.
The FTB provides a summary of California LLC tax requirements and links to relevant tax forms.