How to cancel a California LLC and stop the $800 tax

The short version

California charges every LLC an annual tax of $800, and that charge continues even if the LLC does nothing, until the LLC is cancelled. Cancelling is not one filing. It involves the Franchise Tax Board (FTB), which handles taxes, and the Secretary of State (SOS), which handles the legal existence of the LLC.

In general: stop doing business, file a final tax return with the FTB, pay anything owed, and file a cancellation with the SOS. The order and timing matter, as explained below.

Step by step

1. Stop doing business in California

To avoid the annual tax for later years, the LLC must stop doing or transacting business in California after the last day of its final tax year (FTB Publication 1038).

2. File your final return with the FTB

File the LLC's tax return, Form 568, for the final year. Check the "Final Return" box on the first page and write "final" at the top of the first page, as Publication 1038 directs.

3. Pay what's owed

The $800 annual tax is due by the 15th day of the 4th month of the tax year. For a new LLC, the first payment is due by the 15th day of the 4th month after it registers with the SOS. The FTB's payment voucher is Form 3522. An LLC with California income over $250,000 may also owe an additional fee, estimated on Form FTB 3536.

4. File the cancellation with the Secretary of State

Domestic LLCs file a Certificate of Cancellation, Form LLC-4/7, or the Short Form Certificate of Cancellation, Form LLC-4/8, if they meet its requirements. The FTB says that cancelling within one year of organizing with Form LLC-4/8 means the LLC isn't subject to the $800 tax for its first tax year.

The timing rule that decides whether you owe one more $800

According to Publication 1038, an LLC can avoid the minimum annual tax for the current and later years if it does all three of these:

1. Files its final return for the preceding taxable year on time, including any extension.
2. Stops doing or transacting business in California after the last day of that preceding year.
3. Files its documents with the SOS within 12 months of the date it filed the final return.

This is why the end of the year matters. Missing a step can mean another year's tax. How these rules apply to your situation is a question for the FTB or a tax professional.

If you owe back taxes

The FTB has a voluntary administrative dissolution program for LLCs that have been registered with the SOS for more than 12 months, have stopped doing business (or never started), and have no assets. The FTB says that after the SOS formally cancels the entity, it may waive unpaid qualified taxes, interest, fees and penalties. It does not remove delinquent taxes from before the business stopped operating, and applying "will not legally terminate the entity", so you still file the cancellation with the SOS. Details are on the FTB's program page.

Mistakes that cost people another year

• Treating it as one filing. Closing with the SOS doesn't replace the final return with the FTB, and the reverse is also true.
• Doing nothing. The FTB says the $800 stays due until the LLC is cancelled, even with no activity.
• Missing the 12-month window between the final return and the SOS filing.
• Forgetting the Final Return box. Without it the FTB may treat the LLC as still active.

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Sources

• FTB: Limited liability company
• FTB Publication 1038: Guide to Dissolve, Surrender, or Cancel a California Business Entity
• FTB: Voluntary administrative dissolution or cancelation

Rules and forms change. Confirm current requirements with the FTB and the Secretary of State before you file. EntityKill is not a law firm and does not provide legal or tax advice.