California charges a minimum franchise tax of $800 each year. This is a tax on the privilege of being a corporation. It doesn’t matter whether the corporation is profitable or even if it has any revenue. The state wants its $800 from every corporation every year, and if it’s not paid, the state will suspend the corporation. There is one exception, however.
If you’re planning on forming a corporation near the end of the year, it can sometimes pay to wait a bit. Corporations with a first tax year of 15 days (or fewer) will not have to file a tax return or pay the $800 tax if the corporation conducts no business during those remaining 15 (or fewer) days in its first tax year.
Let’s say that a business owner is planning on incorporating in December (and let’s assume, as is common, that the corporation’s tax year is the same as the calendar year). If the articles of incorporation are filed on December 16 (or earlier), the corporation will have to file a tax return and will owe the $800 franchise tax for that year, even though it existed for only 16 days of that year and even if conducted no business!
On the other hand, if the articles are filed December 17 (or later that month) and the corporation conducts no business that month, no tax return is required and no $800 tax is due for that year.
Not all corporations have a tax year (that is, a fiscal year) that coincides with the calendar year (Jan-Dec.). The following table shows the earliest date in a month when a corporation’s articles of incorporation can be filed with the California Secretary of State and there will be 15 days or fewer in the tax year.
|Month Incorporated and Tax Year Ending on:||Day of the Month:|
|January, March, May, July, August, October, and December (31-day months)||
|17th or after|
|April, June, September and November (30-day months)||16th or after|
|February (29-day month)||15th or after|
|February (28-day month)||14th or after|
The conduct-no-business requirement is a bit tricky. To take advantage of the exception, the corporation must conduct no business at all during the remainder of the month. Doing anything more than simply filing the articles raises a question as to whether the corporation is doing business. To answer that question, professional guidance should be sought.
If you are planning to form a corporation, call Richard Burt first and ask about an entity-selection consultation. A corporation is not always the best form of business organization, even for those looking to limit their liability.