Startup Guide to California Franchise Tax
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If your company is incorporated in California or does business in California, then it needs to file a Form 100 each year to pay franchise tax. For most startups, this amounts to an $800 fee to do business in the state.
So what do you need to know about California franchise tax?
The short version
Most California startups:
- are incorporated as a C Corporation
- are doing business in California
- have a fiscal year starting on January 1
- have zero or negative net income
If all of those apply, then, starting in your second year, you owe $800 in California franchise tax, due April 15. You can pay electronically here.
Payment is due April 15, but as long as you pay on time, you have until November 15 to file your Form 100.
Who pays California franchise tax?
Any corporation that’s incorporated in California or does business in California needs to pay California franchise tax. So what counts as doing business in California? Any company that:
- Engages in any transaction for the purpose of financial gain within California
- Is organized or commercially domiciled in California
- Has 25% of their total sales, 25% of their total property, or 25% of their total payroll in California
- Has California sales, property, or payroll that exceeds a certain threshold
As a practical guideline, the rules are broad enough that if you think you might qualify as “doing business in California,” then you probably have to pay franchise tax.
Note: if you qualify as “doing business in California,” you’ll also need to be registered with the California Secretary of State. This goes beyond the scope of this blog, but you can find out more at the Secretary of State’s website.
When do you need to pay franchise tax?
Most startups have a fiscal year that starts on January 1, so their California franchise tax is due April 15. If your tax year starts in another month, franchise tax is due the 15th day of the fourth month of your tax year.
That being said, as long as you pay on time, California grants an automatic 7-month extension to file, so in practice you need to file your Form 100 by November 15. If you need an extension, you should fill out a form 3539 for your records, but don’t send it in; the extension is automatic.
How much to pay
If you have net income, the California state tax rate on C Corporations is 8.84%. Getting into the weeds on how to figure your net income is far beyond the scope of this blog post, though, so we recommend working with a tax professional.
Even if you don’t have net income, there’s a minimum franchise tax of $800 per year. Corporations are exempt from this minimum for their first year (they’re still subject to the 8.84% rate if they have net income). So most startups owe $0 their first year and $800 each subsequent year, until they start making money.
How to pay your California Franchise Tax
This is part of a series about the most common tax situations startups encounter. It is intended for informational purposes only, and is not tax advice. Every company’s tax situation is different; we recommend working with a tax professional to make sure your company’s needs are met.