Key Takeaways

• Every California LLC, LP, LLP, corporation, and S corp pays an $800 minimum annual franchise tax. There is no longer a first-year exemption for LLCs (AB 85 expired January 1, 2024).
• California LLCs also pay a gross receipts fee that starts at $900 for revenue over $250,000 and scales up to $11,790 at $5 million.
• California S corps pay the greater of $800 or 1.5% of net income. C corps pay 8.84% of net income (with the $800 minimum). Pass-through entities pass income to owners’ personal returns.
• Federal tax treatment depends on entity type and elections. Default LLC and partnership treatment is pass-through; corporations are C corps unless they elect S status.
• Self-employment tax (15.3%) applies to sole proprietors and LLC members on active income. S corp election can reduce self-employment tax for higher-income owners.

What Is the California $800 Annual Franchise Tax and Who Must Pay It?

The California $800 minimum franchise tax is a flat annual tax paid by every entity that does business in or is organized under California law: LLCs, LPs, LLPs, C corporations, and S corporations. It’s paid to the Franchise Tax Board (FTB).

Why it’s called a franchise tax. It’s a tax for the privilege of doing business in California, separate from income tax. You owe it even if your business has no income, operates at a loss, or is dormant — as long as the entity exists or is doing business in California.

Who pays it. Every domestic entity (formed in California) and every foreign entity (formed elsewhere but doing business in California). Sole proprietors do not pay franchise tax — they file on their personal Form 1040 Schedule C. General partnerships (without separate filing) don’t pay either.

First-year treatment. Until January 1, 2024, AB 85 exempted new LLCs, LPs, and LLPs from the $800 in their first taxable year. That exemption expired. New LLCs formed in 2024 or later pay year one. Corporations have a separate longstanding first-year exemption that remains in place. [VERIFY: confirm current first-year corporation exemption rules.]

Due dates. LLCs: by the 15th day of the 4th month after formation, then April 15 each subsequent year. C corps: April 15 (calendar year). S corps: March 15 (calendar year).

How Does Pass-Through Taxation Work for California LLCs and S Corps?

Pass-through taxation means business income flows to the owners’ personal tax returns rather than being taxed at the entity level. Both LLCs (by default) and S corps use pass-through taxation.

Single-member LLC. Default federal treatment is disregarded entity. Income reports on Schedule C of the owner’s Form 1040. California treats it the same way for income tax purposes (Form 568 reports the LLC’s activity, but income flows to the owner).

Multi-member LLC. Default federal treatment is partnership. The LLC files Form 1065 federally and Form 568 in California. Each member receives a K-1 reporting their share of income, which flows to their personal return.

S corp (electing LLC or corporation). The S corp files Form 1120-S federally and Form 100S in California. Each shareholder receives a K-1. The S corp pays the greater of $800 or 1.5% on net income at the California level.

Owner taxation. Pass-through income is taxed at the owner’s personal rates. Federal rates range from 10% to 37%. California rates range from 1% to 13.3%. Combined top marginal rate for high-income California owners can exceed 50% — meaningful when comparing to a Delaware C corp’s 21% federal + 8.84% California rate.

Section 199A deduction. Federal Section 199A allows owners of pass-through entities to deduct up to 20% of qualified business income, with limits and exclusions. The deduction reduces effective federal rates significantly for many small business owners.

What Is the California Gross Receipts Fee and When Does It Apply to LLCs?

California LLCs pay a gross receipts fee under R&TC § 17942 in addition to the $800 minimum franchise tax. The fee is based on the LLC’s California-source gross receipts, not net income.

Schedule. $0 for gross receipts under $250,000. $900 for $250,000-$499,999. $2,500 for $500,000-$999,999. $6,000 for $1,000,000-$4,999,999. $11,790 for $5,000,000+. [VERIFY: confirm current schedule under R&TC § 17942.]

Calculation basis. Gross receipts from California sources, generally interpreted as receipts attributable to California business activity. Multi-state LLCs apportion gross receipts using the rules in R&TC § 25128.7 and related provisions.

No first-year exemption. The gross receipts fee applies in year one even though the $800 minimum doesn’t always (and even after AB 85 expired, the gross receipts fee continued to apply in year one).

Impact on entity choice. The gross receipts fee can make S corp election attractive at higher revenue levels. A California LLC with $800,000 in gross receipts pays $800 + $2,500 = $3,300 in California tax before income tax. The same business as an S corp with similar gross receipts but, say, $200,000 in net income, pays the greater of $800 or 1.5% × $200,000 = $3,000. Comparable but different exposure profiles.

Does a C Corporation Pay More Tax Than an LLC in California?

Generally yes when profits are distributed, generally no when profits are retained.

C corp tax burden. 21% federal corporate tax + 8.84% California corporate tax = roughly 28% combined effective rate at the entity level. Plus shareholder-level tax on dividends when distributed (15%-20% federal qualified dividend rate + up to 13.3% California personal rate).

LLC (default pass-through) tax burden. Owner pays personal rates on net business income, with possible 199A deduction. Combined federal and California rate can exceed 40% at high income levels, but the income only gets taxed once.

Apples-to-apples on $1 million profit. C corp pays roughly $300,000 in corporate tax, leaving $700,000. If distributed as dividends, shareholders pay another $200,000+ in personal tax, leaving the shareholder with roughly $500,000. Total: 50% effective rate.

Pass-through LLC: owner pays personal tax directly on $1 million. If 35% federal effective + 12% California = 47%, roughly $530,000 left after tax. Total: 47% effective rate.

The shift point. When profits are retained at the C corp and not distributed, the C corp comes out ahead because there’s no shareholder-level tax. C corps that retain earnings for growth, R&D, or expansion can have lower current tax burdens than pass-throughs.

QSBS overlay. For C corp founders eligible for Section 1202 QSBS, the calculus changes dramatically — up to $10 million (or 10x basis) of capital gain on a sale can be excluded entirely from federal tax. This single provision often justifies C corp structure for founders building toward an exit.

What Tax Elections Should I Make When Forming a California Business?

Several elections are common at formation.

Entity classification (Form 8832). LLCs default to disregarded entity (single-member) or partnership (multi-member) for federal tax. Form 8832 is used to elect corporate tax treatment instead. Most small LLCs accept the default.

S corp election (Form 2553). Available to LLCs and corporations meeting eligibility requirements. The election must be filed within 75 days of the start of the tax year (or formation) for the election to apply that year.

Accounting method. Cash vs. accrual. Most small businesses default to cash basis, which is simpler. Larger businesses or those carrying significant inventory may need or want accrual.

Tax year. Calendar year is the default. Fiscal year ends are possible for some entities but require specific elections and have limitations for pass-through entities.

Section 754 election. For partnerships and multi-member LLCs taxed as partnerships, this election allows the partnership to adjust the basis of its assets when partner interests are sold or partners die. Useful for partnerships expecting partner changes.

State elections. California passthrough entity tax (PTET) election under AB 150 allows pass-through entities to pay California tax at the entity level, which can produce a federal deduction that bypasses the SALT cap. The election is made annually and can produce meaningful federal savings for high-income owners. [VERIFY: confirm current PTET election rules and 2026 status.]

Make these decisions early. Some elections have hard deadlines that can’t be missed without an IRS late-election relief filing. Others can be changed but with restrictions and waiting periods.

Common California Business Tax Mistakes

Forgetting the $800 in year one. New LLCs after January 2024 owe the $800 immediately, no exemption.

Missing the gross receipts fee. LLCs that grow past $250,000 in revenue without realizing the fee applies face surprise bills.

Late S corp election. Missing the 75-day deadline means waiting until next year (or filing for late relief, which adds complexity).

Not making estimated payments. California requires quarterly estimated payments from most businesses. Underpayment penalties accrue quickly.

Operating in California without registering. Out-of-state entities doing business in California must register and pay California taxes, even if their headquarters is elsewhere.

Letting the entity get suspended. The FTB and SOS can suspend entities for unpaid tax or unfiled Statements of Information. Suspended entities can’t enter contracts, defend lawsuits, or operate legally.

Working with a CPA who knows California specifically is the most important investment a California business owner can make in the first year.

This article is for general information and is not legal advice. For guidance on your specific situation, call (650) 668-8000 or schedule a consultation at baylegal.com/contact.