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Editorial 8 MIN READ

The $800 floor, and why a December LLC in California still owes it

R&TC § 17941 charges every LLC the same minimum on day one, and the only legal escape is a statute most December filers do not know exists

The Editors
Staff, Incorporator.org
8 min read Updated
Contents 6 sections
  1. What § 17941 actually says
  2. The 15-day rule, and where it stops
  3. The gross-receipts fee, stacked on top
  4. What a December formation actually owes
  5. The legitimate grievance
  6. Sources

California LLC owes $800 a year in minimum franchise tax, and that $800 is owed from the moment the entity is on the rolls. The California $800 franchise tax under Revenue and Taxation Code § 17941 does not prorate, does not wait for revenue, and does not care that the LLC was formed in December.

This is the statute that produces the most common grievance letter the Franchise Tax Board receives from new-LLC owners: the one where someone formed on December 3, did nothing before year end, and then received two $800 bills in April. It is, on the bare statute, the correct outcome.

What § 17941 actually says

Revenue and Taxation Code § 17941 imposes an annual tax of $800 on every LLC "doing business" in California or registered with the Secretary of State. The tax applies for each taxable year of the LLC's existence in the state. The first-year payment is due by the 15th day of the fourth month after formation; for a calendar-year LLC that means April 15 of the following year. The statute was enacted as part of the overhaul that authorized domestic LLCs in California in the mid-1990s and took effect with the opening of the LLC form in 1994. It has read, in relevant part, the same way ever since.

The phrase "doing business" is doing less work than a reader might expect. Since the 2011 amendments to § 23101, a corporation or LLC is "doing business" in California if it is "organized or commercially domiciled" in the state, or if its California sales, property, or payroll exceed statutory thresholds. But § 17941 reaches further; it applies to any LLC "registered" with the Secretary of State. A domestic LLC is registered from the day the Articles of Organization are accepted. A foreign LLC is registered from the day its application to register is filed. Registration, not activity, is the trigger.

That is the part that catches December founders. The LLC formed on December 10 is registered on December 10. Its first taxable year ends on December 31, three weeks later. The $800 for that short first year is due April 15 of the following year. A second $800, for the second taxable year, is due June 15 of the following year (the estimated-tax deadline for the second year's liability). By the time a founder has had the entity a full calendar year, two separate $800 payments have become due, and the entity has done nothing.

The 15-day rule, and where it stops

There is an exemption. It is narrow, and it is not in Title 17 of the Revenue and Taxation Code where most people go looking; it sits in § 23114, in the Bank and Corporation Tax Law, and applies by cross-reference to LLCs through § 17946.

Section 23114 provides that an entity is not considered to have a first taxable year if two conditions are met: the entity's first taxable year is 15 days or less, and the entity did no business during that period. Operationally: if the LLC was formed on or after December 17, and does not transact business before December 31, California does not treat that short period as a taxable year. No return is required for it, and no $800 is owed for it.

The details matter. The 15-day count runs from the date the formation document is filed with the Secretary of State, not the date the founder signed it or paid for expedited review. A filing logged on December 17 is day one. December 31 is day fifteen. A filing accepted on December 16 does not qualify. "Did no business" is read strictly by the FTB: issuing invoices, opening a bank account in the LLC's name, signing a lease, hiring an employee, or accepting customer payments all break the exemption. Paying the filing fee to the state does not count as "doing business." Paying a registered agent does not count. Drafting an operating agreement does not count.

The practical window for using § 23114 correctly, then, is roughly the last two weeks of December, for an LLC whose founder is willing to sit on their hands until January 2. That last part is where the exemption quietly fails in practice. Founders who have gone to the trouble of forming an LLC tend to have something they want to do with it. Opening the bank account in December so the December 31 contribution can be recorded in the first year, common tax hygiene for a sole proprietor capitalizing the new entity, breaks the exemption and re-imposes the $800.

There is no statutory version of this exemption that covers a November-filed LLC, or a December-8 filed LLC. Those entities owe the first year's tax regardless of whether they transacted. The calendar is the calendar.

The gross-receipts fee, stacked on top

The $800 is a floor, not a ceiling. Revenue and Taxation Code § 17942 imposes a separate annual fee tied to the LLC's total California income, and the fee is in addition to the § 17941 minimum tax.

The tiers, as they stand in 2019, are set by statute. An LLC with total income from all sources reportable to California of less than $250,000 pays no § 17942 fee. An LLC with total income from $250,000 to $499,999 pays $900. From $500,000 to $999,999, $2,500. From $1,000,000 to $4,999,999, $6,000. At $5,000,000 and above, $11,790. These are flat-dollar amounts for each tier; there is no blending and no proration. An LLC that crosses a threshold by a single dollar pays the full amount of the next tier.

The fee is paid along with the annual Form 568, which is the LLC return and the document every California LLC files whether it owes federal income tax or not. An estimated payment of the fee is due by the 15th day of the sixth month of the current taxable year, using Form 3536. Underpayment produces a 10% penalty under § 19132.

Two features of § 17942 matter for new-LLC planning. First, "total income" for the fee is a gross-receipts measure, not net income. It includes gross ordinary income plus income from the sale or disposition of property, less cost of goods sold and returns and allowances. A low-margin reseller can clear $1,000,000 of California-sourced sales, owe the $6,000 fee, and have a federal net loss for the year. The fee does not care. Second, the 2007 Court of Appeal decision in Northwest Energetic Services, LLC v. California Franchise Tax Board, 159 Cal. App. 4th 841 (2008), found the pre-amendment version of the fee unconstitutional as applied to the full worldwide gross of non-resident LLCs doing some business in California. The Legislature responded by amending § 17942 to base the fee on California-sourced total income only, and the current statute reflects that repair. A new LLC today should not expect any further relief from that line of cases; the California-apportionment fix has been in force for over a decade.

What a December formation actually owes

Consider an LLC formed on December 10, 2019, operating on a calendar-year basis, with no California receipts before year end. The tax calendar for its first 18 months looks like this.

The first taxable year runs from December 10, 2019, through December 31, 2019. The entity does not qualify for the § 23114 15-day exemption because it was formed before December 17. It owes $800 in minimum franchise tax for that short year. That $800 is due April 15, 2020, with Form 568 for tax year 2019, and is paid using Form 3522.

The second taxable year runs January 1, 2020, through December 31, 2020. The entity owes another $800 in minimum franchise tax for 2020. That $800 is due April 15, 2020, using Form 3522 for the 2020 tax year, as an estimated payment for the current year. The two payments land within weeks of each other, and for a large share of new filers they land as a surprise.

If the 2020 receipts clear $250,000, the § 17942 fee stacks on top. Estimated fee on Form 3536 is due June 15, 2020; the reconciliation is on Form 568 the following April. A founder who forms in December and runs even a modest services practice through 2020 can be staring at $800 plus $800 plus $900 before the entity is 15 months old, on top of the $70 Secretary of State filing fee and the $20 Statement of Information fee already covered in our California LLC formation guide.

The legitimate grievance

There is a real objection to be made, and it is the one the Franchise Tax Board hears in ombudsman correspondence every spring. A founder who registered late in the year, at a moment when no income was produced and no customer had paid, is being asked to pay $800 for the privilege of existing on the state's rolls for three weeks. The tax is flat, not proportional. The exemption is narrow and calendar-driven. And the second-year tax comes due only weeks after the first, which compresses a year of cost into a month of cash outflow.

The answer from the state has, historically, been that § 17941 is an excise on the franchise of being an LLC in California, not a tax on income, and the franchise is continuous from the moment of registration. The courts have accepted that framing; it is why the fee survived the Northwest Energetic reasoning, which reached only the gross-receipts component. And the state has, at various points, floated proposals to expand § 23114 into a true first-year waiver. None of those proposals has yet become law. The Legislature's 2019 session closed without enacting one, and any change that does emerge will not affect an LLC forming today.

The practical advice for anyone forming in the last weeks of 2019 is short. If the business has any flexibility on timing and the LLC is not yet doing business, file on or after December 17 and do nothing with the entity until January 2, and the first year's $800 disappears under § 23114. If the filing must happen earlier, the $800 is unavoidable and should be budgeted as formation cost. In neither case should a founder expect the gross-receipts fee to be negotiable; the tier boundaries are bright-line, and the FTB enforces them from the return.

The weaker version of the advice, which is the one most founders actually follow, is to form the LLC in early January if there is any doubt. A January 3 formation produces one taxable year, one $800 payment, and one Form 568 for the first 12 months, which is a cleaner start than any December configuration can offer.

Sources

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