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Legal Update: CA LLCs, LLPs and LPs Won’t Have to Pay Annual $800 Franchise Tax For First Year

If you’ve been on the fence about when to start a new business, now might be a good time.

Due to a recent change in law, any newly-formed limited liability company (“LLC”), limited liability partnership (“LLP”), or limited partnership (“LP”) in California is now exempt from the state’s $800 minimum franchise tax for its first taxable year.

Under prior law, only corporations were given this benefit.

These business structures, especially LLCs, are popular with small businesses. They can provide liability protection, credibility, and often be formed relatively easily. However, California’s minimum $800 franchise tax can be cost prohibitive for many small businesses. This is particularly true for their first year in business, when they may not be generating significant revenue. This tax has become even more challenging for businesses that have started around or during the Covid-19 pandemic.

Supporting New Business Growth

In an effort to support California small businesses and to remove the barrier for new ones, California has changed the law to allow LLCs, LLPs, and LPs to benefit from a first year exemption from its $800 minimum franchise tax.

In other words, any new CA business that is formed as one of these business entities does not need to pay the $800 franchise tax during its first taxable year. The CA legislature hopes that this will help reduce costs for first-year California small businesses and encourage new businesses to form, which will promote economic growth and job creation.

Limited-Time Exemption

It’s important to note that this exemption may not be around forever. It currently only applies to LLCs, LLPs, and LPs that form between January 1, 2021 and December 31, 2023. For this reason, if you’re thinking of starting a new business in CA, right now may be a good time so you can take advantage of this exemption.

Are you thinking of starting a new LLC in California? We can help! Apply for Business Start Legal Bootcamp, a program for new entrepreneurs in the L.A. area who are serious about starting their new businesses or making their side hustle “official”. It is a two-week program designed to help new entrepreneurs DIY the basic legal steps in setting up their new business.

Get more information here: smallbizla.org/business-start-bootcamp

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About the Author

Liam Moriarty is a lawyer and the CEO of Lawgood (https://lawgood.io), a software company that makes it easier for lawyers to draft better contracts. He is an advisor with the LA SBDC and a graduate of Columbia Law School.

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