California Business Entity Taxation
Entity-level landscape
California imposes an annual minimum franchise tax on corporations and a minimum tax on limited partnerships, LLCs, and S corporations. Candidates must know the minimum tax amount, the first-year exemption for corporations, and how the LLC fee is graduated by total income. Understand the corporate income tax rate structure and the alternative minimum tax for corporations.
S corporations and pass-through entities
California recognizes the federal S election but imposes a 1.5% entity-level tax on S corporation income. Know the built-in gains tax treatment and the rules for LLC classification. Pass-through entities must withhold on distributions to nonresident members in certain circumstances.
Traps in questions
Frequently tested: whether the minimum franchise tax applies in the first year (corporations are exempt in their first year; LLCs are not). Another trap: the LLC fee is based on total income from all sources, not just California-source income, and is in addition to the minimum tax. Watch for questions about the 1.5% S corporation tax and whether it applies to the entity or the shareholders.
Rule of thumb
For LLCs, remember two separate charges: the annual minimum tax plus a graduated fee based on total income.
Worked example
An LLC with $600,000 total income owes the annual minimum tax plus the graduated LLC fee for that income bracket; the fee is computed on total income, not apportioned California income.