In order to spur economic development during the downturn, the State of California is removing a barrier to new business starts. If you start an LLC in 2021, you will not have to pay the $800 annual tax during that year.
But don’t let the details trip you up! Here are six tips for taking advantage of this opportunity:
1. The tax break will only apply to the first year of business. You will still be required to pay $800 every year after that.
2. If you don’t need an LLC, don’t create one just because they are free. In many cases, if you don’t have employees yet or you haven’t started making money, a sole proprietorship is all you need. You can always convert the sole proprietorship to an LLC later. The tax break will be available for the first year an LLC exists in 2021 – 2023.
3. Existing LLCs will not qualify for this tax break. Be sure to form your LLC AFTER Jan 1, 2021. If you form the LLC in December 2020, the business will not be considered “new” in 2021 and you will still have to pay the 2021 tax. The tax break is also not available for LLCs formed before 2020.
4. Several entity types actually qualify. In addition to LLCs (Limited Liability Companies), the deal is also in effect for LLPs (Limited Liability Partnerships) and LPs (Limited Partnerships). New corporations already benefited from the first-year exception.
5. Be careful! If you create the LLC but don’t use it, you still owe $800 every year. Those taxes can add up.
6. The waiver is for the “minimum franchise tax” only. Be sure to speak with your tax accountant about any other taxes that you still have to pay.
For more information about how this measure works, click here to check out the state Franchise Tax Board website.
For more information about choosing an entity type (sole proprietorship, LLC, corporation, etc.), join our next webinar on business entities by clicking here.
Or sign up to meet with an advisor one-on-one.
Jocelyn Graf advises on business startup, scaling, and strategy for the Long Beach Small Business Development Center (SBDC) and the Bixel Exchange SBDC at the Los Angeles Chamber of Commerce. Jocelyn enjoys guiding others who dream of owning a tech startup or traditional business through the process of envisioning, launching, and growing their own enterprises.