California has a few business tax laws that stand out from other states. It may subject businesses to double taxation, and it has a higher income tax rate.
Double taxation
The federal government doesn’t tax business owners on both their business and personal income. California business law taxes LLCs, S-corporations and other pass-through entities twice: once on the business income and again on the personal income.
Corporate tax
Small businesses that chose a corporate tax structure when setting up their LLCs may have the same corporate tax rate as corporations. California’s corporate tax rate is 8.84%, and it applies to your net taxable income.
Alternative minimum tax
Your LLC may also be subject to alternative minimum tax. This tax places limits on how much you can write off to reduce your taxes. California’s alternative minimum tax rate, which also applies to corporations, is 6.65%.
Franchise tax
LLCs, limited partnerships, limited liability partnerships and S corporations are subject to franchise tax in California. C corporations that didn’t have a positive net income could opt to pay the smaller franchise tax rate instead of their regular corporate tax rate. The franchise tax rate in California is 1.5%, unless you have an LLC.
For LLCs, California uses a flat dollar amount based on the income bracket your business is in. If your small business’s gross income is between $250,000 and $499,999, your franchise tax is only $900. At a gross income of $500,000–$999,999, LLCs would pay $2,500, and at $1,000,000–$4,999,999, the franchise tax is $6,000. Businesses that gross $5,000,000 or above must pay $11,790.
Before forming a small business, you should understand how each type of business structure handles taxes. This could help you minimize your tax bill.