CA Franchise Tax and Business Fees: A Small Price for Significant Protection
Author: Bradford Embree, MSEI
Date: 6/26/2023
Introduction:
Starting a business in California comes with various costs, among which are the California Franchise Tax and other filing fees. While these expenses may seem like a burden, they play an essential role in establishing your business correctly and ensuring significant asset protection. This article will shed light on these costs and explain why they are a small price to pay for the benefits they confer. For this to matter, you have to first go file your entity with the Secretary of State in California. This filing costs $95 at the time of filing.
Understanding the California Franchise Tax:
Every LLC, corporation, or other type of business entity in California is subject to the Franchise Tax. This annual tax is the cost of doing business in the state, regardless of whether your company is actively conducting business or turning a profit. Usually, if you start a business in CA, you have to pay the $800 first year franchise tax by the 15th day of the 4th month after the beginning of the current tax year. For this, you must file the Limited Liability Company Tax Voucher (FTB 3522).
In California, you also have to estimate and pay the LLC fee annually after the first year. This LLC fee must be estimated and paid by the 15th day of the 6 months of the current taxable year. The form for the Estimated Fee for LLCs (FTB 3536) is what you would need to fill out, but this form only for year two and on. Also, if the LLC is not going to make over $250,000 in year two or later, the LLC should only file FTB 3522. The table below is what the California Franchise Tax Board provided on their website.
With all of what usually happens out of the way, now we get to address what the temporary benefit that you get if you are starting a business in California right now. There is an exemption from paying the filing fee for the first year. This is exactly what the Franchise Tax Board put on their website:
“For tax years beginning on or after January 1, 2021, and before January 1, 2024, LLCs that organize, register, or file with the Secretary of State to do business in California are not subject to the annual tax of $800 for their first tax year.
Other Filing Fees:
Starting a business in California also involves some other initial and ongoing filing fees, including:
Statement of Information Filing Fee: California requires businesses to file a Statement of Information annually (for corporations) or every two years (for LLCs). There is a nominal fee of $25 associated with this filing.
Name Reservation Fee: If you wish to reserve your business name before filing your formation documents, there’s a small fee of $10 to do so.
The Value of These Fees:
While these fees may add up, they are trivial compared to the cost of not properly establishing and maintaining your business entity. Here’s why:
Asset Protection: Properly setting up and maintaining a business entity like an LLC or corporation creates a legal separation between your personal assets and your business assets. This means that if your business were ever sued, your personal assets would typically be protected. This level of asset protection far outweighs the costs of the Franchise Tax and other business filing fees.
Credibility and Brand Protection: Formally establishing a business entity not only lends credibility to your business but also helps protect your brand by preventing others from using your business name.
Tax Benefits: Depending on how your business is structured, you may be eligible for certain tax advantages that can offset the costs of these fees.
Access to Business Credit and Funding: A formally established business entity can make it easier to access business credit and funding opportunities, potentially leading to business growth.
Conclusion:
Starting a business in California involves various fees, including the Franchise Tax and filing costs. However, these are not just administrative expenses but investments in the future of your business. The asset protection, credibility, and potential tax benefits these costs help secure are invaluable. Remember, in business, as in life, it’s often true that “you get what you pay for.” Consulting with a knowledgeable business attorney can help ensure you’re setting up your business for success right from the start.