California's $800 Franchise Tax

Every California business entity pays a minimum $800 franchise tax. But that's not where the story ends — it's where the math gets painful.

The baseline: everyone pays $800

Every LLC, S corp, C corp, and LP registered in California owes at minimum $800 per year to the Franchise Tax Board. This applies even if the entity earned nothing. It applies even in year one — though LLCs formed after January 1, 2021 get a first-year waiver, which is worth noting if timing your formation.

Sole proprietorships and general partnerships are the exception — they don't owe the $800. But that tax savings comes bundled with unlimited personal liability, which is its own conversation.

Where it compounds: the LLC gross receipts fee

California charges LLCs an additional annual fee based on total gross income — not net income, not profit. Revenue is the input. This is where entity selection gets consequential:

A medical group doing $3M in collections doesn't owe $800. It owes $6,800 — and that's before a dollar of income tax, self-employment tax, or payroll liability. This is a flat drag on every LLC at scale.

"The gross receipts fee isn't based on profit. It hits whether you had a good year or a brutal one."

The S corp arbitrage at higher revenue

At $1M in gross revenue, an LLC owes $6,800 in annual state fees — every year, win or lose. An S corporation pays $800. The $6,000 differential is pure savings, before you factor in the self-employment tax reduction from running payroll through an S corp structure.

The tradeoff is real: an S corp requires a reasonable W-2 salary, quarterly payroll deposits, annual payroll filings, and tighter restrictions on shareholder count and class of stock. For a solo practitioner or two-partner medical or dental practice, this is manageable. For a more complex ownership structure, you'll want to weigh the administrative lift against the savings.

First-year formation tactics

California waives the first-year $800 franchise tax for LLCs formed on or after January 1, 2021. That waiver only applies to the $800 minimum — the gross receipts fee still applies if your first-year income crosses the threshold. If you're forming late in the year with minimal revenue, you may dodge both. If you're forming mid-year with a full book of business transferring in, you won't.

The practical move: if you're converting an existing practice, don't assume the first-year waiver saves much. Run the actual numbers against your expected year-one revenue before you pick a formation date.

California nonconformity: the OZ and QSBS wrinkle

Worth noting for those with investment structures alongside their operating entity: California does not conform to federal Opportunity Zone deferral and exclusion rules, and does not recognize QSBS gain exclusion under IRC §1202. So an entity structure that looks efficient federally may carry full California gain recognition regardless. If your practice is investing in QOFs or you hold QSBS from a portfolio company, the entity housing those investments matters at the state level — and the $800 minimum is the least of your California exposure.