California Franchise Tax Explained

What Is the California Franchise Tax?

The California franchise tax is a tax imposed on corporations, S corporations, LLCs, and partnerships for the privilege of doing business in California. It is separate from California income tax — you owe the franchise tax even if your business has no income or operates at a loss. The franchise tax is administered by the FTB and is one of the most significant California-specific tax costs for small business owners.

$800 Minimum Franchise Tax

Every corporation, S corporation, and LLC doing business in California owes a minimum franchise tax of $800 per year — regardless of income, regardless of losses, and regardless of whether the business was active during the year. This $800 minimum applies even if the business had zero revenue. The only way to eliminate the $800 minimum is to formally dissolve the entity with the California Secretary of State and file a final return.

KDA's common finding: business owners who formed California LLCs years ago and stopped operating them — but never formally dissolved them — continue to accrue $800 per year in franchise tax, plus penalties and interest. If you have an inactive California entity, contact KDA to evaluate whether dissolution makes sense.

LLC Annual Fee (Gross Receipts)

In addition to the $800 minimum franchise tax, California LLCs owe an annual fee based on gross receipts from California sources:

This fee is in addition to the $800 minimum — a California LLC with $600,000 in gross receipts owes $800 + $2,500 = $3,300 in franchise tax and fees before any income tax is calculated.

Exemptions & First-Year Rules

New California LLCs formed on or after January 1, 2021 are exempt from the $800 minimum franchise tax for their first taxable year. This exemption applies to the first year only — the $800 minimum applies in year two and every year thereafter. S corporations and corporations do not have this first-year exemption.

Due Dates & Estimated Payments

The $800 minimum franchise tax is due on the 15th day of the fourth month of the taxable year — April 15 for calendar-year entities. LLCs must also pay estimated franchise tax payments. The LLC annual fee is due with the LLC return (Form 568) on April 15. KDA tracks franchise tax due dates for all business clients and includes franchise tax planning in every annual tax review.

Tax Planning Around Franchise Tax

The franchise tax is largely unavoidable for active California businesses, but KDA evaluates several planning strategies: (1) Entity selection — for businesses with gross receipts under $250,000, an S Corp may have lower total California tax than an LLC (no gross receipts fee, though S Corps have their own 1.5% California income tax rate). (2) Dissolution timing — dissolving an entity before the end of the taxable year can eliminate the following year's $800 minimum. (3) Multi-state planning — businesses with operations outside California may be able to allocate some gross receipts to other states, reducing the California LLC fee.