California’s Tax System Brings Complexities for New Funds and Investors

Launching a new fund or investing with business partners in California comes with a critical early decision — securing the right CPA. California’s state income tax laws are among the most complex and demanding in the country, requiring careful attention from the outset. Nearly all businesses operating within the state are subject to an annual tax, and California is notorious for issuing unexpected tax notices with little to no warning.

Understanding how California’s tax rules apply to different business structures — such as partnerships and limited liability companies (LLCs) — is key to staying compliant and preventing unnecessary penalties.

Partnerships

Partnerships include general partnerships and limited partnerships. These entities file California Form 565 Partnership Return of Income and pay an annual tax of $800. The tax form and the annual tax are due two and half month after the close of the business tax year, making it easier to remember since both the tax payment and filing occur simultaneously.

Limited Liability Companies

California’s tax rules for LLCs can catch many business owners and CPAs off guard, particularly in the business’ first few years. The state distinguishes between LLCs classified as a partnership and single-member LLCs that are owned by a pass-through entity, individual or a non-pass-through entity.

Additionally, if the LLC generates more than $250,000 in California-source gross receipts, it must pay a fee ranging from $900 to $11,790, depending on its level of gross income/receipts. An estimate of this fee must be paid by five and a half months after the beginning of the current tax year.

LLCs Classified as Partnerships

Partnership LLCs file Form 568, Limited Liability Company Return of Income, and pay an annual tax of $800. The tax form is due two and a half months after the business tax year closes, while the annual tax is due three and a half months after the start of your tax year. Essentially, the annual tax needs to be prepaid in the same tax year.

Many LLC owners may not consider tax compliance during the early months of their business, often resulting in late payment of the initial annual tax.

Single-member LLCs

For a single-member LLC (SMLLC) owned by a pass-through entity, Form 568 is due two and a half months after the tax year ends. For a SMLLC owned by a non-pass-through entity including an individual, the form is due three and a half months after the tax year ends. The payment due date remains the same as for partnership LLCs, which is three and a half months after the start of the tax year.

The table below includes examples for a 2024 calendar-year taxpayer:

Navigating tax rules can be complex, so it’s important to consult your tax advisor early in the process to avoid unexpected issues during and after tax season. Weaver can help. Contact us today.

Authored by Minh Dinh and Blayne Lowary

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