The California Legislature has enacted legislation to exempt limited liability companies, limited partnerships and limited liability partnerships from California’s annual minimum franchise tax in the entity’s first year of existence. The law was enacted to encourage small businesses that might have a problem paying $800 in their first year of business to form in California. This law also puts California LLCs, LPs and LLPs on par with California corporations, who have long had this exemption.

However, the new law is only in effect for tax years 2021, 2022, and 2023, in order to allow the legislature to review annual reports from the Franchise Tax Board to evaluate whether the new law does indeed increase the number of LLCs, LPs and LLPs that form in California.

The revised Revenue & Taxation Code sections are §17941(g)(1) (LLCs); §17935(f)(1) (LPs); and §17948(e)(1) (LLPs).

One caveat – this new law only exempts LLCs from paying the minimum tax ($800). If an LLC has gross income of more than $250,000 in its first year, it will be subject to a franchise tax, beginning at $900.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.