Introduction
California imposes a minimum $800 franchise tax on most business entities—even if you make no income. In 2025, this tax continues to affect startups, holding companies, and out-of-state businesses operating in California. But with proper planning, you may be able to reduce or eliminate it legally.
What Is the California Franchise Tax?
Applicable Code: California Revenue & Taxation Code §17941, §23153
The California Franchise Tax is an annual tax imposed by the Franchise Tax Board (FTB) on corporations, LLCs, LPs, and LLPs for the privilege of doing business in the state. The minimum amount is $800 per year, even for entities with zero income or losses.
Who Is Subject to the $800 Minimum Tax?
| Entity Type | Subject to Franchise Tax? |
|---|---|
| C Corporations | Yes (Form 100) |
| S Corporations | Yes (Form 100S) |
| LLCs (member-managed or manager-managed) | Yes (Form 568) |
| Limited Partnerships (LP) | Yes |
| Sole Proprietorships | No |
| General Partnerships (not registered) | No |
| Nonprofits (qualified) | Exempt |
When Can You Avoid or Reduce It?
- First-year exemption for newly formed LLCs, LPs, and LLPs (not for corporations)
- Dissolution before year-end to avoid next year’s tax
- Foreign (out-of-state) entities not “doing business” in California
- Nonprofits with approved tax-exempt status (Form 3500 or 3500A)
- Electing S Corporation with negligible income may pay less overall than an LLC with gross receipts fees
Exemptions and First-Year Relief
First-Year Exemption (AB 85)
Under California’s AB 85, certain entities are exempt from the $800 tax in their first tax year.
- Applies to: LLCs, LPs, and LLPs formed on or after January 1, 2021
- Not available for corporations (C or S)
Example
An LLC formed on June 15, 2025, and closed before December 31, 2025, owes no $800 minimum tax for that year.
Out-of-State LLCs and the Nexus Trap
Even if your entity is formed in another state (like Wyoming or Delaware), you’ll still owe California tax if you do business in California. This includes:
- Having employees or contractors in California
- Shipping goods from California
- Having a physical office, warehouse, or agent
- Earning income from California clients
The FTB aggressively audits foreign entities with any California connections.
Step-by-Step Guide to Minimize Franchise Tax
Step 1: If starting a new LLC or LP, confirm if you’re eligible for the first-year exemption
Step 2: Avoid forming before January unless necessary (you’ll owe tax for the full year)
Step 3: Consider out-of-state formation only if you have no nexus in California
Step 4: Dissolve or cancel unused entities before year-end to avoid next year’s fee
Step 5: Consult a CPA to explore whether an S Corporation election or trust structure may reduce long-term liability
Conclusion
California’s franchise tax may feel unavoidable, but with proactive entity planning, first-year relief, and strategic structuring, you can often reduce or eliminate this cost. Every business is different—getting advice before forming or operating is essential to save money and avoid penalties.
Call to Action
Want to avoid California’s $800 franchise tax or minimize it legally in 2025?
Schedule a consultation with Anshul Goyal, CPA EA FCA, a U.S.-licensed CPA and IRS Enrolled Agent who helps startups, holding companies, and remote founders structure their business for compliance and tax efficiency.
📅 Book your appointment here
FAQs – California Franchise Tax
Q1: Can I avoid the $800 franchise tax completely?
Yes, if you form a qualified LLC, LP, or LLP and dissolve it in the same year—your first year is exempt.
Q2: Do I have to pay franchise tax if I had no income?
Yes. The $800 minimum applies regardless of whether your entity made money.
Q3: I registered in Delaware—do I still pay California tax?
If you do business in California, you owe the tax—regardless of where your LLC is formed.
Q4: Is the first-year exemption available for corporations?
No. C and S Corporations do not qualify for the first-year relief.
Q5: When should I dissolve my entity to avoid next year’s tax?
Before December 31. Otherwise, you owe franchise tax for the following year.
About Our CPA
Anshul Goyal, CPA EA FCA is a U.S.-licensed Certified Public Accountant, IRS Enrolled Agent, and Fellow Chartered Accountant. With over 15 years of experience and $200M+ in client tax savings, Anshul advises startups and entrepreneurs on compliance, state taxation, and entity planning across California and the U.S.
Disclaimer
This blog is for informational purposes only and does not constitute legal or tax advice. California’s franchise tax rules are subject to change. Always consult a licensed CPA before forming or dissolving a business entity in California.