CALIFORNIA REDUCES FRANCHISE TAXES TO ATTRACT NEW BUSINESS
In an effort to attract new businesses to California, the Legislature has passed a new law which reduces the minimum franchise taxes otherwise payable by certain qualifying businesses. Assembly Bill No. 10, passed in July of 1999, but not effective until January 1, 2000, waives the minimum franchise tax applicable to "qualified new corporations" for two years, a savings of up to $1,600. The savings is even more significant, as California typically requires minimum franchise taxes for a new corporation to be pre-paid.
A "qualified new corporation" is one which incorporates or qualifies to do business in California January 1, 2000 and reasonably estimates that it will have gross receipts reportable to the State of California of less than $1 million for such income period. It does not include any corporation that began business operations before incorporation, whether as a single proprietorship or any other form of business entity. The benefit of this new law is limited to corporations, and does not apply to limited partnerships, limited liability companies, limited liability partnerships, or a new subsidiary corporation, or to any corporation that reorganizes solely for the purpose of reducing its minimum franchise tax.
Existing law requires corporations not exempted by this bill to pay a minimum franchise tax of $800. A "qualified new corporation" formed between January 1, 1999 and December 31, 1999 is entitled to a reduction to $500 for its second taxable year. All of such existing corporations will not be entitled to the benefit of this new law, which, again, is applicable only to those corporations forming after January 1, 2000. As noted above, the other benefit of the new legislation relates to the prepayment of franchise taxes. Current law requires a new corporation to make an $800 estimated prepayment of franchise taxes (reduced to $300 for "qualified new corporations" for income years between January 1, 1999 and December 31, 1999). The prepayment is made to the Secretary of State with the filing of articles of incorporation or the statement and designation by a foreign corporation. The effect of the new law is to allow exempted corporations to avoid the prepayment obligations entirely. Again, this benefit is only bestowed on "qualified new corporations," as described above.
A few caveats in considering the usefulness of this new law to your business. Most significantly, while saving the minimum franchise tax is certainly positive, in and of itself, it may not be a good enough reason to choose to do business in the corporate form (as opposed to a partnership, limited liability company or sole proprietorship). There are very important business reasons for choosing one form of entity over another, which should be carefully considered. For a review of some of these reasons, I refer you to an article appearing in Volume I of Schelberg & Ross' newsletter. Additionally, the law is intended to benefit businesses with gross proceeds of $1 million or less. To the extent that your business' actual results exceed that amount (net of returns and allowances), the savings in the minimum franchise taxes will be subject to recapture.
