California's $800 LLC Franchise Tax: The 'First Year Is Free' Myth That Costs Non-Residents Money

The Myth That Quietly Costs Founders $800

If you have ever researched where to form a US company, you have probably read that "California is expensive" — and that "the first year is free." The first half is true. The second half is now outdated, and believing it is one of the more expensive mistakes a non-resident founder can make.

California charges every LLC an $800 annual minimum franchise tax, payable to the Franchise Tax Board (FTB) whether or not the business earns a single dollar. For a few years, brand-new LLCs were exempt from that tax in their first year. That exemption has expired. If you formed or registered a California LLC in 2024, 2025, or 2026, you owe the $800 for year one — full stop.

Who Actually Has to Pay

The $800 tax is not limited to people who live in California or who deliberately chose California. Under the FTB's rules, your LLC must pay if it is organized in California or if it is "doing business" in California — and the second category catches far more non-residents than they expect.

The FTB treats you as "doing business" in California if any of the following is true: you engage in any transaction for financial gain within California; your LLC is organized or commercially domiciled there; or your California sales, property, or payroll exceed annual thresholds. For 2025, those thresholds are California sales above $757,070 (or 25% of total sales), or California property or payroll above $75,707. For 2024 the sales threshold was $735,019.

The practical takeaway: forming your LLC in Wyoming or Delaware does not automatically keep you out of California's reach. If you store inventory in a California warehouse, hire someone there, or run a business that is effectively managed from California, the FTB can treat you as doing business in the state — and the $800 follows.

The "First Year Free" Rule — and Why It No Longer Helps You

Here is the exact history, because the internet is full of stale advice. For tax years beginning on or after January 1, 2021, and before January 1, 2024, newly formed LLCs were exempt from the $800 annual tax for their first tax year. That window has closed. The FTB's own guidance confirms the exemption applied only to those years.

So a guide written in 2022 telling you "your first year is free in California" was correct then and is wrong now. For any LLC starting its life in 2024 or later, the $800 is due in year one.

When the $800 Is Due

For your first year, the annual tax is due by the 15th day of the 4th month after you register with the Secretary of State. If you register on, say, March 10, your first $800 payment is due by July 15. In every year after that, the $800 is due by the 15th day of the 4th month of your taxable year — April 15 for a calendar-year LLC. Payment is made with FTB Form 3522.

This tax keeps recurring every year, even during dormant years, until you formally cancel the LLC with both the Secretary of State and the FTB. An LLC that simply stops operating but is never cancelled continues to accrue the $800 — plus penalties and interest.

The Extra Fee Most People Forget

The $800 is only the floor. If your LLC's California-source income reaches $250,000 or more, you owe an additional LLC fee on top of the $800, on a sliding scale: $900 for income of $250,000–$499,999, $2,500 for $500,000–$999,999, $6,000 for $1,000,000–$4,999,999, and $11,790 for $5,000,000 or more. This estimated fee is due by the 15th day of the 6th month of the tax year, using FTB Form 3536, and you still file Form 568 (the LLC return) by the original due date.

The Penalties for Getting It Wrong

Ignoring California is not a quiet option. Unpaid franchise tax accrues penalties and interest. Separately, the Secretary of State imposes a $250 penalty if you fail to file your Statement of Information, which the FTB collects. And an LLC that does not meet its obligations can be suspended — losing the legal right to operate, enforce contracts, or even properly close itself in California.

How to Avoid the Trap

The cleanest defence is to decide deliberately whether you actually need California at all. Many non-resident founders have no real connection to the state and are better served by forming in Wyoming, New Mexico, or another low-cost jurisdiction — provided they are not "doing business" in California under the thresholds above.

If you formed a California LLC by mistake and never used it, the FTB allows a short-form cancellation if you file within 12 months of organizing — which lets you avoid the $800 for that first tax year. After that window, the tax is generally owed for any year the LLC existed.

Have Questions About Your Own Situation?

Every founder's setup is different, and "doing business in California" can be a genuinely grey area. If you are unsure whether your LLC is exposed to the $800 tax — or how to exit California cleanly — it is worth talking it through with people who handle this every day. No pressure, no hard sell, just clear answers.

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