Avoiding Franchise Tax in California: Tips for Small Business Owners

How do I avoid franchise tax in California?
The only way to avoid the annual $800 California franchise fee is to dissolve your company, file a ‘final’ income tax return with the FTB and to submit the necessary paperwork. Once your company no longer exists, neither does your liability protection.
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You can be a small business owner seeking for strategies to lower your costs and boost your revenue. Avoiding the California franchise tax is one way to save money. There are ways to reduce or get rid of this tax, which is charged on companies that are incorporated in the state. You can register your company as a Limited Liability Company (LLC) rather than a corporation as one alternative. LLCs must pay an annual charge of $800 even though they are not subject to California’s franchise tax. The franchise tax, which is based on the company’s net profits, is generally significantly higher than this fee.

By incorporating your company in a different state, you can also avoid paying franchise taxes. You may, for instance, form an organization in Wyoming or Nevada, neither of which has a franchise tax. However, bear in mind that if you have a physical presence or conduct business in California, you will still need to register your company as a foreign corporation.

If your firm is already formed in California, reorganizing it can help you pay less in franchise taxes. You may, for instance, change your C corporation into a S corporation. S corporations are taxed at the individual level rather than being subject to federal income tax. As a result, shareholders receive a pass-through of earnings and losses, which they then declare on their individual tax returns.

Remember though, even if a S corporation has no income, it must still submit an annual tax return to the IRS and the Franchise Tax Board. Penalties and interest costs may be assessed in the event of non-filing. The S corp tax rate for 2020 is 21% on taxable income up to $50,000, 34% on taxable income between $50,001 and $75,000, and 39% on taxable income exceeding $75,000.

As a result, there are a number of strategies to avoid or reduce franchise tax in California, such as forming an LLC, incorporating in another state, or reorganizing your business as a S corporation. To make sure you are in compliance with all state and federal rules, you should speak with a tax expert or lawyer before making any significant modifications to your company structure.

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