Navigating through the tax landscape in California can be difficult. Limited Liability Companies (“LLC”) have many different issues to consider. California taxes domestic LLCs (LLCs formed within California) and foreign LLCs (LLCs formed outside California but doing business in California) with two separate taxes.
The Annual Tax
Every domestic and foreign LLC must pay an Annual Tax in California. California assesses a flat $800 tax to every domestic and foreign company doing business in California. The Annual Tax is due on the 15th day of the 4th month following the close of the LLCs tax year, because most LLCs have a calendar year end as their tax year. Thus, the LLC must pay the Annual Tax by April 15.
Newly formed LLCs must pay the Annual Tax by the 15th day of the fourth month following the date the Articles of Organization were filed with the California Secretary of State. For example, XYZ, LLC filed their Articles of Organization on March 1. XYZ, LLC must pay the Annual Tax by July 15. Existing companies must pay the Annual Tax by the earlier of two dates: (1) immediately upon commencing business within California, or (2) when they register with the Secretary of State.
There is only one exception to the annual tax, called the 15-Day Exception. The 15-Day Exception has two necessary conditions. First, the LLC must not have conducted business within California during the tax year. Second, the LLC’s tax year must have been 15 days or less. In all other circumstances, the annual tax is a requirement.
An LLC pays the Annual Tax on Form FTB 3522. The form should be sent to:Franchise Tax Board PO Box 942857 Sacramento, California 94257-0631
The LLC Fee
All domestic and foreign LLCs must also pay a fee in California based on total income “from all sources derived from or attributable” to California. See California Revenue & Taxation Code § 17942. Total income for the LLC fee is defined as “gross income as defined in Section 24271, plus the cost of goods sold, paid or incurred in connection with the trade or business of the taxpayer.” The LLC fee paid by the company depends on the amount of income unlike the Annual Tax which is a flat fee that all companies must pay. LLCs with California income less than $250,000 do not have to pay the LLC fee. LLCs with total income more than $250,000 and less than $500,000 the fee is $900. LLCs with total income of $500,000 or greater but less than $1,000,000 the fee is $2,500. LLCs with total income of $1,000,000 or greater but less than $5,000,000 the fee is $6,000. For LLCs with income of $5,000,000 or greater the fee is $11,790.
To determine the income from California, look to California Revenue & Taxation Code § 25135, 25136 and 25137. The LLC must estimate and pay their annual LLC fee prior to the 15th day of the 6th month of the current tax year (June 15th). If the LLC’s tax year ends prior to this date, then the LLC must pay the fee prior to the due date for the filing of Form 586. To pay the estimated fee, the LLC is to use Form FTB 3536.
If the fee is underestimated, the LLC is subject to a penalty of 10 percent of the underpayment. The penalty can be avoided if the estimated fee for the current year is equal to or greater than the fee owed by the LLC in the prior year. The underpayment and possible penalty are due on the date of the LLC’s tax return (15th day of the 4th month after the end of the LLC’s tax year).
The estimated fee, Form FTB 3536 and penalty (if applicable) are all to be sent to:Franchise Tax Board PO Box 942857 Sacramento, CA 94527-0651
The Annual Tax and LLC Fee are some of the required costs of operating a domestic or foreign Limited Liability Company under California law. Failure to abide by these regulations will result in undesirable consequences for your LLC. To avoid these detriments, it is important to read and understand the mandatory forms and payments of conducting an LLC registered in California.