When you are either creating a corporation or LLC in the state of California, you must have encountered this dreaded 800-dollar Minimal Franchise Tax. It is a recurrent charge, and this makes starting-up businesses confused and infuriated. What then is the exact payer of it, what it is funding, and whether any law can help it be avoided?
Who has to Pay The $800 Tax?
This is a tax that is mandatory for most formal entities registered with the California Secretary of State. You will have to pay this fee when your business is:
- A domestic and foreign corporation (C Corporation).
- An S Corporation (it is an election of tax; however, the legal form is a corporation).
- A Limited Liability Company (LLC) (with Single-Member LLCs).
- Limited Partnership (LP) or Limited Liability Partnership (LLP).
The important aspect is that this tax is imposed on those types of entities that protect their owners against personal liability. This tax is not paid by sole proprietorships and general partnerships, but also not by their owners, who are not provided with any personal liability protection. If you are facing challenges, you must look for a tax expert (like an EDD audit lawyer) and get some much-needed help.
The tax is not only the first-year tax. It is billed upfront, so on the 15th day of the 4th month of your entity’s formation, you have to pay in advance. In the case of an LLC established in January, the initial payment of 800 is carried out before April 15th.
How Can We Avoid Paying the $800 Tax?
The word avoid is very emphatic; it would be better said to reduce the load or postpone the commencement. An operating business has no hidden loophole to avoid paying this fee completely; however, in some cases, there are some strategies involved.
a) Short Year Dissolution Strategy
This is the most typical way of evading future tax burden. In the case of an LLC or corporation that is not doing business anymore, you need to make a formal dissolution of the company through the Secretary of State in California.
The tax will be paid up-front at a cost of $800. In case you close your business at the beginning of the year, you will only pay a proportionate part of the year it existed. More to the point, you will prevent the yearly bill of 800.
b) What About the First-Year Exemption for New Corporations?
This is a very crucial, frequently overlooked chance in new businesses. This means that, providing that you create your LLC or incorporate your business between 1st January and 1st April, your first year’s tax is not payable until the next year. Your first down payment will be your second year of operation, worth $800.
c) Importance of Considering the First Date
You can never escape the tax, but you can play around with the clock. Setting up your entity during the last quarter of the year will result in you paying the $800 fee on that half-year and then paying the full upcoming year fee of $800 almost immediately thereafter, which is, at the same time, a large cash flow burden on a startup. Having professional tax people around will help you handle a payroll tax audit and similar things easily.
Minimum Franchise Tax of $800 is an unnegotiable price to bear the protection of liability of your California business. You cannot avoid it as an active entity, but you may plan it out:
Consider the price of the LLC of $800 against the protection of your personal funds under business lawsuits or even debts before making the decision that the LLC is not worth the price. To the majority, the security is well justified by the admission cost.