California Franchise Tax First Year Exemption: Who Qualifies

A corporation that newly incorporates in California, or a foreign corporation that newly registers to do business here, owes no $800 minimum franchise tax for its first taxable year. That is the California franchise tax first-year exemption, and it applies to both C corporations and S corporations.¹ It does not, however, wipe out every California tax obligation in year one, and several entity types are shut out of the exemption entirely.

Which Businesses Get the First-Year Waiver

The statute uses the phrase “incorporates or qualifies to do business in this state,” which covers three groups:¹

Newly formed California C corporations.²
Newly formed or qualified California S corporations filing an initial return.³
Foreign (out-of-state) corporations that register with the California Secretary of State for the first time.⁴

You will see online advice claiming the waiver is only for C corps, or that foreign corporations are shut out. Neither is accurate. Electing S corporation status also does not disqualify you.

Who Does Not Qualify

The statute expressly excludes several entity types:¹

Limited liability companies (LLCs)
Limited partnerships (LPs)
Limited liability partnerships (LLPs)
Qualified Subchapter S subsidiaries (QSubs)
Charitable organizations described in R&TC Section 23703
Regulated investment companies, real estate investment trusts, and real estate mortgage investment conduits

LLCs, LPs, and LLPs each owe the $800 annual tax starting in their first year of doing business or registration with the Secretary of State.⁵ There was a temporary reprieve. Under AB 85, new LLCs, LPs, and LLPs that organized or registered between January 1, 2021 and January 1, 2024 had the first-year annual tax waived.⁶ That window has closed. Anything formed or registered on or after January 1, 2024 owes the $800 in year one.

An anti-abuse rule sits alongside these exclusions: a corporation that reorganizes solely to avoid the minimum franchise tax loses the exemption.¹ Dissolving one corporation and forming another to reset the clock is the classic trigger.

What the Exemption Does Not Cover

The waiver removes the $800 minimum. It does not remove income tax. If your new corporation is profitable, it still owes tax on net income at the applicable rate: 8.84% for C corporations and 1.5% for S corporations.⁷

Normally a California corporation owes at least $800 even with zero income. The exemption removes that floor in year one only. A new C corporation with no income pays nothing. A new C corporation with $50,000 of net income pays 8.84% of that income ($4,420), not that amount plus the $800. Starting in year two, the $800 minimum applies regardless of income.⁸

A separate item to know about: LLCs that hit certain revenue levels owe a gross-receipts fee on top of the $800 annual tax, running from $900 at $250,000 of California income up to $11,790 at $5 million or more.⁵ That fee is never waived.

Estimated Tax Still Applies

Waiver of the minimum tax does not waive estimated tax. The FTB expects new corporations to make quarterly installments based on annualized current-year income, and skipping them can trigger an estimated tax penalty even in the exempt year.⁹ This is where some founders get caught: the $800 is gone, but if the company is profitable, quarterly payments are still due.

Filings You Still Owe in Year One

The exemption is a tax waiver, not a filing waiver. Every corporation subject to the franchise tax must file Form 100 (California Corporation Franchise or Income Tax Return), including in its first year.⁸ The return is due the 15th day of the fourth month after the close of the taxable year: April 15 for a calendar-year corporation.¹⁰ Your first fiscal year begins on the date of incorporation, and tax is calculated on net income with no minimum floor applied.

Separately, every California corporation and registered foreign corporation must file an initial Statement of Information (Form SI-550) with the Secretary of State within 90 days of registration.¹¹ The filing fee is $25. After that, it is annual. Missing the 90-day deadline exposes the corporation to penalties and eventual suspension.

Ways to Lose the Exemption

A handful of situations can take the first-year waiver off the table:

Reorganizing solely to avoid the minimum franchise tax. The FTB will deny the exemption if it concludes the restructuring served that purpose.¹
Converting the corporation into an LLC or limited partnership. Those entity types are excluded from the statute, so any first-year corporate waiver goes with them.
Operating before formal incorporation. The first taxable year begins on the date of incorporation with the Secretary of State. Pre-incorporation activity can produce separate tax liability under whatever structure existed then.

What Happens If You Skip the Tax After Year One

Missing payment after the exemption ends triggers a two-part late payment penalty: 5% of the unpaid tax up front, plus 0.5% per additional month, capped at 40 months and 25% of the unpaid amount.¹² Interest runs on top at the FTB’s corporate underpayment rate, currently 7% through June 30, 2026.¹³

Beyond penalties, unpaid tax leads to suspension for domestic corporations and forfeiture for foreign ones. The FTB can suspend a corporation’s powers, rights, and privileges once tax, penalty, or interest is still unpaid at the end of the 12th month after the close of the taxable year.¹⁴ A suspended corporation cannot legally do business, sue, or defend itself in court, and contracts signed while suspended are voidable by the other party.¹⁵ Reviving the corporation means filing all past-due returns, paying everything owed, and submitting Form FTB 3557 BC.

Out-of-State Corporations and the Doing-Business Threshold

A foreign corporation that registers with the Secretary of State gets the same first-year waiver as a domestic one.⁴ In year two, the $800 minimum applies regardless of revenue.

One boundary worth knowing: even without registering, a corporation can be treated as doing business in California and owe the franchise tax if it crosses certain activity thresholds. For 2025:¹⁶

California sales exceeding $757,070, or 25% of total sales
California property exceeding $75,707, or 25% of total property
California payroll exceeding $75,707, or 25% of total payroll

These figures adjust each year. Crossing any single threshold makes the corporation liable for the franchise tax whether or not it has formally registered. If you run an out-of-state corporation with California customers, employees, or property, check these numbers before assuming the state has no claim on you.

1
California Legislative Information. California Revenue and Taxation Code 23153
2
State of California Franchise Tax Board. C Corporations
3
State of California Franchise Tax Board. S Corporations
4
State of California Franchise Tax Board. Corporations – Section: Exceptions to the First Year Minimum Tax
5
State of California Franchise Tax Board. Limited Liability Company
6
California Legislative Information. California Revenue and Taxation Code 17941
7
State of California Franchise Tax Board. Business Tax Rates
8
State of California Franchise Tax Board. 2025 Instructions for Form 100 Corporation Tax Booklet
9
State of California Franchise Tax Board. 2025 Instructions for Form 100-ES Corporation Estimated Tax
10
California Franchise Tax Board. Form 100, 100S, 100W, or 100X
11
California Secretary of State. Statement of Information Form SI-550 Instructions
12
State of California Franchise Tax Board. FTB Pub. 1024 Penalty Reference Chart
13
State of California Franchise Tax Board. Interest and Estimate Penalty Rates
14
California Legislative Information. California Revenue and Taxation Code 23301
15
State of California Franchise Tax Board. My Business Is Suspended
16
State of California Franchise Tax Board. Doing Business in California