Small business owners and entrepreneurs in California looking to save some start-up money and avoid other tax-related hassles may want to consider waiting to start a business until the end of the year to take advantage of California’s “15-day rule.” The 15-day rule applies to both newly-formed California corporations and LLCs as long as owners:
All California LLCs (whether domestic or foreign) must pay an annual $800 minimum LLC tax to the California Franchise Tax Board (“FTB”). Normally, the first payment is due by the 15th day of the fourth month after the LLC is formed. The problem is that if you form an LLC before December 17th of any given year, you will have to pay the minimum LLC tax twice in less than one calendar year. By taking advantage of the 15-day rule, a newly-formed LLC only has to pay the minimum tax by April 15th the following year (and every year thereafter on this date), thus avoiding paying the tax twice in its first year of existence.
Similarly, if you form an LLC before the 15-day window, a state tax return would need to be filed by the following April 15th for the abbreviated first year of the LLC’s existence. However, under the 15-day rule, no tax return would need to be filed the following April 15th, thus relieving the new business owner of at least one regulatory burden.
The benefit of forming a California corporation while taking advantage of the 15-day rule is even greater than the one enjoyed by those forming an LLC. This is because newly incorporated businesses are not required to pay the minimum franchise tax in their first tax year. So, if you incorporate during the 15-day rule’s window, your first minimum franchise tax payment would not be due for more than 15 months after you formed your corporation. Also, the newly-formed corporation’s first state tax return would not be due until the same time its first minimum franchise tax payment was due, more than 15 months after incorporation.
For information on the practical considerations involved with taking advantage of the 15-day rule when you form an LLC or incorporate in California, check out this post from the Creative Vision Legal blog.
If you are not sure what legal service you need (for instance, should you incorporate or form an LLC), start by choosing whether you would like a “Legal Advice Phone Call” or “Legal Advice by Web Cam/Skype” for a 30-minute consultation with the firm’s attorney.
