Limited Liability Companies in California

The LLC is the default choice for most new businesses, and for good reason: flexible ownership, minimal formalities, and pass-through taxation without the eligibility restrictions that constrain S corporations.

California makes it expensive in ways owners consistently do not anticipate. There is an $800 annual tax owed regardless of income. There is a second fee charged on gross receipts — revenue, not profit — that can reach $11,790. And the first-year waiver that many websites still describe expired at the end of 2023.

We advise LLC owners in Temecula, Murrieta, San Diego, Riverside, and San Bernardino.

The First-Year Tax: Correcting a Common Error

Assembly Bill 85 waived the $800 annual tax for an LLC’s first taxable year — but only for tax years 2021 through 2023. It was not renewed.

Every California LLC formed on or after January 1, 2024 owes $800 in its first year. The payment is due the 15th day of the fourth month after formation, using Form 3522 — not with the annual return.

An LLC formed July 1, 2026 owes $800 by November 15, 2026. Form later in the year and the timing gets worse: an LLC approved in November 2025 owed its first payment by February 15, 2026, and the next by April 15, 2026 — two payments ten weeks apart, covering different tax years. Founders who form in the fourth quarter are frequently surprised by this back-to-back sequence, which is a reason to consider a January formation date when the launch timing is flexible.

Note the asymmetry: corporations remain exempt from the minimum franchise tax in their first year. LLCs no longer are. That reverses the usual assumption that an LLC is the cheaper way to start.

The Gross Receipts Fee

Separate from the $800, R&TC 17942 imposes a fee based on California-source gross receipts:

California gross receipts	Annual fee
Under $250,000	$0
$250,000 – $499,999	$900
$500,000 – $999,999	$2,500
$1,000,000 – $4,999,999	$6,000
$5,000,000 and above	$11,790

The fee is on revenue, not profit. An LLC with $600,000 in sales and $40,000 of profit owes $2,500 plus the $800 — $3,300 to the FTB on $40,000 of earnings. For high-revenue, low-margin businesses — distribution, construction, staffing, food service — this is often the decisive argument for incorporating instead.

The fee is estimated during the year on Form 3536, due the 15th day of the sixth month, and reconciled on Form 568 at filing. It applies in the first year too, and the $250,000 threshold is not prorated for a short year — an LLC formed in October that books $300,000 by December 31 owes the $900 fee plus the $800 tax for a partial year of operation.

How LLCs Are Taxed Federally

An LLC is not a federal tax classification. By default:

• Single-member — disregarded; reported on Schedule C, subject to self-employment tax on all net earnings
• Multi-member — partnership; Form 1065 with K-1s to members

An LLC may instead elect corporate treatment, and electing S corporation status is common once profit is high enough that self-employment tax savings exceed payroll costs. The LLC keeps its governance structure and operating agreement while obtaining S corporation payroll treatment.

The California fees do not go away. An LLC taxed as an S corporation still owes the $800 and the gross receipts fee. It does not pay the 1.5% S corporation franchise tax, but for a high-revenue business the gross receipts fee is often larger than 1.5% would have been — which is why converting to an actual corporation, rather than just electing S treatment, sometimes makes sense.

Where California Departs from Federal Law

California’s conformity date is January 1, 2025 under Senate Bill 711 — before OBBBA — so the state does not follow it:

• Section 199A QBI — up to 20% federally for pass-through owners; no California equivalent
• Bonus depreciation — never adopted
• Section 179 — $25,000 California cap against $2.5 million federally

Each requires a Schedule CA adjustment. Returns that carry federal figures through without the add-back create discrepancies the FTB detects.

The offsetting benefit is the pass-through entity elective tax, extended through 2030 by Senate Bill 132. A qualifying multi-member LLC pays 9.3% at the entity level — deductible federally without regard to the SALT cap — and members take a credit. For 2026 and later, missing the June 15 prepayment reduces the member’s credit by 12.5% of the shortfall.

Liability Protection and What Defeats It

An LLC shields members from business debts, but the protection fails under predictable circumstances: commingling personal and business funds, undercapitalization, ignoring the operating agreement, using the LLC as an alter ego, and personal guarantees — which lenders and landlords routinely require, and which the LLC cannot override.

The LLC also never protects against your own negligence or professional malpractice. California additionally prohibits most licensed professionals from using LLCs, requiring a professional corporation instead — a point that catches physicians, attorneys, architects, and accountants at formation.

Single-member LLCs deserve particular attention. California courts scrutinize them more closely, and the charging order protections that shield multi-member LLCs from a member’s personal creditors are weaker when there is only one member.

Staying in Good Standing

• Statement of Information — within 90 days of formation, then biennially
• Form 3522 — the $800 annual tax
• Form 3536 — estimated gross receipts fee
• Form 568 — annual California return
• EDD registration — within 15 days of paying $100 in wages in a quarter

An LLC that stops filing is suspended or forfeited, losing the right to conduct business, defend a lawsuit, or enforce contracts — and contracts entered while suspended may be voidable. Revivor requires filing the delinquent returns and paying the balance. See unfiled returns.

The Operating Agreement Does Real Work

California does not require an LLC to have a written operating agreement, and single-member LLCs frequently operate without one. That is a mistake in both cases.

Absent a written agreement, the default provisions of the California Revised Uniform Limited Liability Company Act govern — and the defaults rarely match what the members actually intended. Profit allocations, management authority, transfer restrictions, buyout mechanics on death or withdrawal, and deadlock resolution all fall back to statutory rules written for no one in particular.

For multi-member LLCs, the provisions worth negotiating before there is a dispute are the ones that determine what happens when the relationship ends: how an interest is valued, whether remaining members have a right of first refusal, and what triggers a mandatory buyout. These are straightforward to draft in advance and nearly impossible to agree on afterward.

For single-member LLCs, the operating agreement serves a different purpose — it is evidence of the separation between owner and entity, which matters directly when a creditor argues the LLC is an alter ego.

Frequently Asked Questions

Is my LLC exempt from the $800 in its first year?

No, not if it was formed in 2024 or later. The AB 85 waiver covered only tax years 2021 through 2023. Websites still describing a first-year exemption are out of date.

Do I owe the $800 if the LLC made no money?

Yes. It is a flat tax for the privilege of operating an LLC in California, owed regardless of revenue, profit, or activity.

Can I avoid California fees by forming in Nevada or Wyoming?

No. An LLC doing business in California must register here and owes the $800 and applicable fees regardless of where it was organized — plus the other state’s costs.

Is the gross receipts fee based on profit?

No, on California-source gross receipts. A business with high revenue and thin margins can owe thousands while barely profitable.

When should an LLC elect S corporation treatment?

Generally once profit exceeds a reasonable salary by roughly $60,000 to $80,000. The LLC fees continue to apply after the election.

Can licensed professionals form an LLC in California?

Generally no. Most licensed professionals must use a professional corporation. Check before filing — this is a common and avoidable formation error.

What happens if I dissolve the LLC?

Dissolution must be filed with both the Secretary of State and the FTB. Simply stopping operations does not end the $800 annual obligation, and the liability continues to accrue.

Can a single-member LLC have employees?

Yes. The LLC obtains an EIN and handles payroll in its own name, registers with the EDD once wages reach $100 in a quarter, and files employment tax returns — even though the entity is disregarded for income tax purposes.

How is the gross receipts fee calculated for a multi-state business?

On California-source gross receipts, not worldwide revenue. Sourcing follows California’s market-based rules, which for services generally look to where the benefit is received rather than where the work was performed — an area where businesses selling into California underestimate their exposure.

Get the Structure Right Before the Fees Compound

California’s LLC costs are predictable once you know them and expensive when discovered late — usually in year two, when the gross receipts fee arrives with penalties attached. For businesses approaching the fee tiers, the entity question is worth revisiting rather than treating as settled at formation.

Pietro Canestrelli holds an LL.M. in Taxation and advises on LLC formation, entity conversion, tax elections, and FTB compliance and suspension matters. Schedule a consultation, or review our entity formation and business law services.