Should You Wait Until January to Form Your California Business?

No matter what state you start a new business in, there are usually some additional tasks to attend to besides filing your formation documents to the Secretary of State. The California Franchise Tax is one of such tasks that can surprise new business owners after formation, and could leave them on the hook for an extra $800 or more in state fees.

If you’re considering forming a new California company before the year ends, the annual franchise tax may be something to consider.

What is California’s Annual Franchise Tax?

The California Franchise Tax is a tax levied by the California Franchise Tax Board on behalf of California’s Secretary of State. Almost every California corporation, LLC or other business that is formed, operating, or registered as a foreign entity will need to file a tax return and pay the $800 fee.

You can calculate your total California Franchise Tax for a corporation using the business tax rate chart on the California Franchise Tax Board’s website. If you own an LLC, you’ll pay the $800 minimum plus an additional LLC fee if your company makes over $250,000. You can calculate your LLC’s California Franchise Tax fee using the sliding scale chart on the same website.

Entities exempt from the annual franchise tax

Some entities, like California non-profits and charities, are able to apply for an exemption to the California Franchise Tax, provided they meet certain qualifications. They’ll still need to file reports to California’s Franchise Tax Board, though, and California’s Franchise Tax Board provides a resource on filing requirements for exempt organizations. These exempt entities include:

• Churches
• Credit unions
• Veteran’s organizations
• Political organizations

The California Franchise Tax Board’s classification chart includes an exhaustive list of exemption types.

When is the California annual franchise tax due?

Due dates for the annual franchise tax are based on a business’s fiscal year, not necessarily when the business was formed. A fiscal year defines the 12 month period that aligns with your companies financial cycle and tax filings. For simplicity, most businesses elect a standard calendar year (January-December) as their fiscal year. Due dates for the annual franchise tax generally fall into 3 groups:

Single member LLCs owned by an individual or non-pass through entity: Initial reports are due 4 months and 15 days after filing your formation documents, and subsequent reports are due on the 15th day of the 4th month after the end of your fiscal year. For most, this will be April 15th.

S-corporations and most types of LLCs (series, multi-member), general partnerships, limited partnerships (LP), limited liability partnerships (LLP), limited liability limited partnerships (LLLP): Initial franchise tax returns are due 4 months and 15 days after the registration of your business, and ongoing reports are due on the 15th day of the 3rd month after the end of your fiscal year. For most of these entities, this will be March 15th.

C-corporations: Reports are due on the 15th day of the 4th month after the end of your fiscal year. For most c-corporations, this will be April 15th.

Keep in mind that these dates are based on a calendar fiscal year, and if you choose a custom fiscal year you may have different due dates. Reaching out to the California Franchise Tax Board is the best way to make sure you understand your due date.

New entities and the California Franchise Tax

Delaying the formation of your new business by even two weeks could save you $800 in dues to California’s Franchise Tax Board. This is thanks to some of the complicated rules surrounding the annual franchise tax’s due date. Here’s what you need to know:

Forming in the last quarter of the year

For most LLCs, forming in the last quarter will mean needing to file two returns: one 4 months and 15 days after filing your formation documents, and one on your standard due date which is determined by your fiscal year.

Corporations have an exemption for the first year’s $800 minimum, but they’ll still need to file a return for 2024 and pay a tax based on a percentage of net revenue by their due date, along with a new report for 2025 with the $800 minimum applied.

For any new entity, this creates double the administrative work, and incurs extra costs for a brand new business. Along with your initial tax return filed to California’s Franchise Tax Board, you’ll also need to file an initial California Statement of Information, or annual report. If you’re unaware of these responsibilities and file a return late, you could be faced with late fees issued by California’s Franchise Tax Board.

Benefits of first quarter formations

Waiting to form your new entity until the first quarter of the year, or even providing a future active date on your formation filing and delaying business activities, can provide some breathing room and reduce initial tax costs for a new entity.

For corporations, this would mean paying a relatively minimal tax on your first franchise tax return and only needing to file one return. For LLC owners, you can save yourself the minimum $800 fee on your initial tax filing and, of course, the labor of filing a second return to the California Franchise Tax Board.

Whenever you’re ready to form your new company in California, whether it’s tomorrow or next year, Northwest is here to help. We’ll simplify the process for you and even handle your initial Statement of Information as a courtesy. Reach out to us today!

Why you might Still Form late in the year

While there are some notable benefits to waiting until the new year to start your business, cases where delaying your formation doesn’t yield the same benefits:

Market opportunity: if you’ve got a major opening for a new business launch that could be weakened by waiting, it might be worth the extra fees and administrative work. A well researched opportunity with great potential can easily trump some short-term headaches.

Liability protection: If you’re already operating as a sole proprietorship, and you may be at risk while operating during the holiday season, forming now to protect your personal assets is a great idea. For example, offering a service hanging decorative lights for the holidays might be more safely managed under an LLC.

Time-sensitive offers: If you’ve been seeking investments for a new business, or working to get a charity off the ground, you might receive offers just before the year closes. For many investors and donors, this could be an effort to use the rest of an annual budget or capitalize on last-minute tax breaks through charitable donations. If you find yourself in this position, and the pros outweigh the cons, don’t hesitate to get your operation off the ground.

Timing (Your Formation) is Everything

With so many nuances at play when forming a California entity, it’s important to review the timing of your registration carefully. Annual tax dues, filing requirements, and immediate opportunities should all be considered before you press the gas pedal on a new business venture.