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Did you know that approximately 100,000 new corporations are created annually? Also, another 250,000 LLCs, Partnerships, and Sole Proprietorships are formed in California annually. However, the current pandemic has taken a toll on businesses across California, and tech-heavy Silicon Valley and Mountain View have not been immune. The pandemic has driven millions out of employment and adversely affected the number of startups seeking to get started in California. 

Fortunately, all hope isn’t lost for aspiring startups following California’s 2020 Budget Act Governor Newsom signed into law on June 29th last year. This new law relieves new small businesses because it exempts startups from California’s $800 minimum Franchise Tax during their first year. Consequently, the legal changes will remove some financial barriers to small business formations. 

Formerly, this exemption benefitted corporations. Due to this new legislation, all Limited Liability Companies (LLCs), Limited Partnerships (LPs), and Limited Liability Partnerships (LLPs) intending to register, file, or organize to operate in California will also benefit. The new startup incentive runs between January 1, 2021, and December 31, 2023. 

Understanding California’s Franchise Tax

But what exactly is California’s Franchise Tax? Answering this question is critical because it will help potential startup owners understand the legal framework they will benefit from. California’s Franchise Tax is a tax businesses pay for doing business in California. It applies to the following types of business formations.

  • S Corporations 
  • Standard Limited Liability Companies (LLCs)
  • Limited Partnerships (LPs)
  • Limited Liability Partnerships (LLPs)
  • Conventional corporations (C corporations)
  • LLCs that want to be recognized as corporations without being subjected to corporate income tax

Under this law, an S Corporation’s Franchise Tax is 1.5% of its net revenues with a minimum of $800. A standard LLC pays a varying flat fee that depends on its total revenues collected in California. An LP and LLP will pay a minimum of $800. 

Every business subjected to this tax must pay it annually as long as it’s due. This legal requirement remains binding irrespective of whether you didn’t do any business or made losses unless you dissolve your business. You should pay this tax on or before the 15th day of the 4th month from the date you filed with the SOS to clear your tax obligation.

The Exemption History

California’s tax exception tradition began in 1998. This exemption benefitted corporations only until its recent expansion in 2020. Unfortunately, the Franchise Tax Board (FTB) reports that only three‑quarters of newly formed corporations benefit from this tax exemption. Why? Because they don’t claim it. Yes, they don’t claim this tax relief because they don’t understand their tax filing requirements. That’s why a business formation attorney comes in handy to help you maximize this extended exemption.

Get Help from a Business Formation Attorney in California Today

Do you want to claim your share in this extended Franchise Tax relief but don’t know how to go about it? Don’t worry because you aren’t alone. You can contact an experienced startup attorney in California today or call us at (650) 701-7617.

- David Arato

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