Every new business must decide its form of ownership. From sole proprietorship to corporation, there are several ways to organize your business, each with its own advantages and disadvantages. California recently provided a new advantage for limited liability companies (LLCs), limited liability partnerships (LLPs), and limited partnerships (LPs). Normally, a minimum franchise tax of $800 is imposed annually on the aforementioned entities. However, California will now waive the minimum tax for the first year of the entity’s existence, under two conditions.
First, the LLC, LLP, or LP in question must be registered with the California Secretary of State on or after January 1, 2021 but before January 1, 2024. Second, the waiver applies only to business entities with gross receipts of less than $250,000 for the year (rounded to the nearest dollar). The tax is scaled to gross receipts (not net income or profits), with $900 incurred for gross receipts from $250,000 to $499,999, $2,500 for gross receipts from $500,000 to $999,999, $6,000 for gross receipts from $1,000,000 to $4,999,999, and $11,790 for gross receipts of $5,000,000 or more.
To summarize: If the LLC was registered on or after January 1, 2021, and has annual gross receipts of $249,999 or less, the minimum tax of $800 would be waived. However, if the same LLC happened to have annual gross receipts of $250,000, it would owe a minimum tax of $900.