California's $800 Minimum: The Trap for Wyoming LLCs

Two conditions joined by "or." Doing business in California, or organized in California. Either one is enough.

The second sentence is the one that costs people money after they have stopped trading. The tax runs until you cancel the LLC, not until you stop using it.

The Wyoming pitch is that Wyoming has no state income tax and a cheap annual report, so form there and avoid California. The Wyoming figures are on the Wyoming page.

That works only if you have no California nexus. The annual tax attaches to doing business in California, and your state of formation is not part of that test. Forming elsewhere changes which state issued your certificate. It does not change where you are doing business.

If your LLC has California nexus, you owe California its annual tax and Wyoming its annual report, and you are now filing in two states instead of one.

This is the single most out-of-date thing in circulation about California LLCs.

Read the date range in that quote. It opens on or after the start of 2021 and closes before the start of 2024, so any tax year beginning after it is outside.

Guides advertising "your first year in California is free" are describing a window that closed. If a formation service is using it as a selling point, that tells you when they last checked.

One narrow exception survives: a short-form cancellation within one year of organizing, on SOS Form LLC-4/8, means the LLC is not subject to the first-year tax. That is a route for a company you wind up almost immediately, not a planning strategy.

California charges a separate LLC fee once total California income passes $250,000: $900 from $250,000 to $499,999, $2,500 from $500,000 to $999,999, $6,000 from $1,000,000 to $4,999,999, and $11,790 at $5,000,000 or more.[3]California Franchise Tax Board, Limited liability company

It is calculated on income rather than on profit, so a loss-making year does not reduce it:

Read the second column against the first. At the top of the third band the fee is several times the annual tax on its own, and it is charged on income, so a loss-making year does not reduce it.

The FTB gives a worked example: register with the Secretary of State on June 18 and the first annual tax is due September 15.

Underpaying the estimated fee by the original return due date draws penalties and interest.

You are not in California, so it feels irrelevant. Three situations where it is not.

You hired someone there. A California-based contractor or employee is the classic nexus trigger and it is the one founders create without noticing.

You hold inventory there. Goods in a California warehouse, including third-party fulfillment, is physical presence.

You registered with the Secretary of State. Registering as a foreign LLC to do business in California satisfies the second limb of the test on its own, whether or not you are trading yet.

Whether a given set of facts creates nexus is a question with a real answer that depends on your specifics, and it is worth paying a California practitioner for rather than guessing from a blog.

The annual tax is one of several things California can reach you for, and they arrive through different doors.

Sales tax is a separate regime with a separate threshold, set well above the figure usually quoted from Wayfair, and California's own wording reaches sellers located outside the United States. The threshold and that wording are on sales tax nexus, and neither has anything to do with the annual tax.

One California employee can cross the doing-business line on its own. The Franchise Tax Board applies a payroll test met either at a dollar figure or at a share of total payroll, whichever is lower, and a company whose only US employee lives in California is at the whole of it. The figures are on hiring in the US.

And if you dissolve, the tax stops on cancellation rather than on ceasing trade. Filing the paperwork is the action that stops the meter, which is covered on how to close a US LLC from abroad.

I formed in Wyoming. Do I owe California anything? Only if you are doing business in California or registered with its Secretary of State. Your formation state does not decide it. If you have California nexus, you owe the annual tax regardless of where the LLC was formed.

My first year should be free, right? Not any more. The waiver covered tax years beginning on or after January 1, 2021 and before January 1, 2024. Anything starting in 2024 or later is outside it.

I stopped trading. Does the tax stop? No. The FTB says the tax is due "even if you are not conducting business, until you cancel your LLC." Cancelling is the action that stops it.

Is the annual tax the whole California bill? It is the floor. Above a quarter of a million dollars of California income a separate income-based LLC fee applies on top, on the schedule above.

How do I know if I have nexus? That is exactly the question worth paying for. Employees, contractors, inventory and registration are common triggers, and the details matter.