An out-of-state LLC may have California registration and tax obligations even if it was formed elsewhere. California considers factors such as whether the LLC conducts transactions for financial gain in the state and whether its California sales, property, or payroll exceed statutory thresholds.
A foreign LLC may also need to register with the California Secretary of State before transacting intrastate business in California. Registration requirements and Franchise Tax Board tax obligations are related but involve separate legal rules.
File an Application to Register a Foreign Limited Liability Company with the California Secretary of State. The current filing fee is $70.
File an initial Statement of Information within 90 days of registration.
Continue filing a Statement of Information every two years. The current Statement of Information filing fee for an LLC is $20.
Address applicable Franchise Tax Board filing and payment requirements, including Form 568 and the $800 annual LLC tax when required.
California’s Secretary of State currently confirms the $70 foreign LLC registration fee, while LLC Statements of Information are due within 90 days and every two years thereafter.
California Taxes for Out-of-State LLCs
On the surface, the California Franchise Tax appears to be similar to other corporate tax structures that have been implemented in states across the country. Essentially, the California Franchise Tax requires a business to:
- $800 annual LLC tax: An LLC that is registered or doing business in California is generally subject to an $800 annual tax, even if it does not earn a profit.
- Additional LLC fee: An LLC with at least $250,000 of total income derived from or attributable to California may also owe an additional fee. The current fee ranges from $900 for California income of $250,000–$499,999 to $11,790 for California income of $5 million or more.
This franchise tax is required for any business in California that meets the following qualifications:
- The organization engages in business in California that results in profit, or that is for the purpose of generating a profit.
- The LLC is registered in the state of California.
- The LLC is qualified to conduct business in the state of California.
- The LLC is not registered in California but it regularly completes business transactions in the state.
It should be noted by business owners that the minimum franchise tax fee is required by all LLCs in California or doing business in California, regardless of whether or not they have generated a profit within the last tax year. Any business that exists in the state or that meets the qualifications for the franchise tax fee must pay the annual fee. It’s an implication that leaves many individuals and entrepreneurs wary of starting up a new business in California.
Out-of-state LLCs and the California franchise tax
Recognizing the fact that they may have to pay a franchise tax fee to the state of California simply for conducting business with people or organizations who reside in the state, many out-of-state proprietors try to avoid meeting the qualifications for this tax. As it stands, they are already responsible for filing taxes within their own state, and they are not always open to the idea of paying corporate taxes to a state in which their business is not located and in which they do not reside.
California may consider an LLC to be doing business in the state when it:
- Actively engages in a transaction in California for financial or pecuniary gain.
- Is organized or commercially domiciled in California.
- Has California sales exceeding the lesser of the applicable statutory threshold or 25% of total sales.
- Has California real or tangible personal property exceeding the lesser of the applicable threshold or 25% of total property.
- Has California payroll exceeding the lesser of the applicable threshold or 25% of total payroll.
For 2025, the latest thresholds published by the California Franchise Tax Board are $757,070 for California sales and $75,707 for both California property and payroll. These thresholds are adjusted periodically, so businesses should confirm the amount applicable to the tax year being reviewed.
Penalties associated with the California franchise tax
Naturally, many businesses – both within California and outside of the state – try to work the system so that they do not have to pay the hefty franchise tax fee imposed by the state government. However, it is not advisable for businesses to go to great lengths to avoid this tax. The reality is, there are strict penalties associated with tax evasion, and additional penalties that can be imposed for avoiding the franchise tax fee specifically.
The penalties associated with the California Franchise Tax include:
- Suspension or forfeiture: An LLC that fails to file required returns or pay taxes, penalties, or interest may have its California powers, rights, and privileges suspended or forfeited. Contracts entered into during suspension or forfeiture may become voidable at the request of another party.
- Additional penalties: The FTB may impose penalties and interest for missing returns or unpaid tax. In certain circumstances, a business may also face a $2,000 penalty for failing to file required returns after receiving a written demand.
Out-of-state LLCs that are required to qualify in California should complete the appropriate registration with the California Secretary of State and address any applicable filing and payment obligations with the Franchise Tax Board. This will ensure that they can complete all business transactions in the state as efficiently and effectively as possible, and will give them a better understanding of which tax obligations they must meet at the end of the taxable year. It is recommended that LLCs doing business in California work closely with a dedicated tax planning lawyer to make sure that they understand all of the rules and regulations within the state, and that they create a plan that allows them to conduct their business in the state.
The California Franchise Tax may come as a surprise to out-of-state business people who are simply trying to provide their goods and services to the people of California. However, it’s important to adhere to these tax regulations and to avoid attempting to evade these fees. Tax evasion can come with significant penalties, and even out-of-state LLCs are required to adhere to the state’s tax laws.
Business owners who want to create a viable business plan that will allow them to conduct business in California in a cost-efficient manner should partner with a legal team who can advocate for them and design a legal plan of action that adheres to the rules and regulations of the state. For more information on business law in California, contact us today.
FAQ's
Do California Residents Pay Tax on Income From an Out-of-State LLC?
Generally, California residents are taxed on income from all sources, including income received through an LLC formed outside California. A California resident who is a member of an LLC generally includes the member’s distributive share of LLC income in California taxable income. Depending on the circumstances, a credit may be available for qualifying taxes paid to another state.
Do I Need to Register My Out-of-State LLC in California?
An LLC formed in another state generally must register with the California Secretary of State if it is transacting intrastate business in California. Separately, an LLC may have California tax obligations if it meets the Franchise Tax Board’s “doing business” standards, including applicable transaction, sales, property, payroll, or domicile tests. Because the registration and tax standards are not identical, each should be reviewed separately.