Exemption From California’s Minimum Franchise Tax

Without a lot of fanfare, the California legislature enacted legislation to exempt limited liability companies, limited partnerships and limited liability partnerships from California’s annual minimum franchise tax in the entity’s first year of existence.  This law was enacted to encourage small businesses that might have a problem paying $800 in their first year of business to form in California.  This law also puts California LLCs, LPs and LLPs on par with California corporations, who have long had this exemption. 

However, the new law is only in effect for tax years 2021, 2022 and 2023, in order to allow the legislature to review annual reports from the Franchise Tax Board to evaluate whether the new law does indeed increase the number of LLCs, LPs and LLPs that form in California.

The revised Revenue & Taxation Code sections are §17941(g)(1) (LLCs); §17935(f)(1) (LPs); and §17948(e)(1) (LLPs).

Note that this new law only exempts LLCs from paying the minimum tax ($800).  If an LLC has gross income of more than $250,000 in its first year, it will be subject to a franchise tax, beginning at $900.

This eBulletin was prepared by Teri Lynn Kalawakua Shugart, Teri@shugartlegal.com.