NEW EXEMPTION FROM MINIMUM FRANCHISE TAX FOR CALIFORNIA LIMITED LIABILITY COMPANIES STARTING JANUARY 1, 2021

By Denise Olrich, Attorney at Law.

On June 29, 2020, Governor Newsom signed the 2020 Budget Act. In an effort to help businesses impacted by the Covid-19 pandemic, included in the new budget was relief for businesses who wish to form a limited liability company (LLC), limited partnership (LP) or limited liability partnership (LLP) in the State of California.

Under the new budget, these business entities will enjoy a new first year exemption from the minimum franchise tax, which is currently $800.00 per year. This exemption was previously available only to corporations for their first year.

Under the 2020 Budget Act, LLCs, LPs and LLPs will also be exempt from the minimum franchise tax for their first taxable year, provided they form on or after January 1, 2021 and before the end of 2022. The expanded exemption will remain in effect for 2 years, and is only good for the business entity’s first taxable year.

The LLCs, LPs and LLPs using the new exemption will remain subject to the minimum franchise tax during their second year as the expanded exemption is only good for one year.

In short, LLCs, LPs or LLPs that start up in either 2021 or 2022 will be exempt from the franchise tax for their first year, but will be required to pay the minimum tax for their second year. The expanded exemption will expire at the end of 2022.

Corporations are already exempt from the franchise tax for their first year and their exemption does not expire, unlike the new exemption for LLCs.

For more information contact Denise Olrich at [email protected].