People who set up a limited liability company or partnership in California won’t have to pay the annual $800 minimum tax levied on business entities their first year, under the budget bill signed by Gov. Gavin Newsom, but the waiver only applies to those formed from 2021 through 2023.
That won’t help freelancers or small businesses who set up an LLC late last year or this year because they thought, or were told by clients, it was necessary or helpful to comply with AB5, the complicated worker-classification law that took effect Jan. 1.
Christine Mathias Farnum set up an LLC, NorCal Soccer Games, in November “and stupidly paid the $800 for the first year,” which she thought would cover their first year in business, but found out it only covered calendar year 2019.
“Then I had to pay it again this year,” she said.
The company, which she is starting with her boyfriend, Dirk Denkers, a retired soccer player, will run soccer tournaments for adults.
“We wanted to be in any potential compliance with AB5,” she said. “We thought we would have to hire referees as employees, not independent contractors, and from my research it seemed like an LLC was the best option.”
Michael Goldstein, a freelance writer in Los Angeles, also set up an LLC this year because his biggest client said he needed one to keep getting assignments, even though AB5 does not require this.
To set up a single-member LLC in California, you have to pick a business name not in use, file a form with the California Secretary of State and pay a $70 fee. You also have to pay an $800 tax every year, even if the business is not active, until the LLC is canceled. This tax is separate from state income tax.
“You don’t make a huge amount of money as a freelancer,” said Goldstein, who would like to “abandon” the LLC if he could.
AB5 requires hiring entities to treat every California worker as an employee — not an independent contractor — unless the worker meets three requirements, known as the ABC test, or qualifies for one of numerous exemptions. Workers who qualify for an exemption must still must be treated as employees unless they pass an older, multifactor test known as Borello, which is less strict.
In January, “we had lots of discussions about LLCs,” said Karen Anderson, who runs a Facebook group for freelancers opposed to AB5. Some people thought setting up an LLC would help them preserve their contracting relationship with employers but “we have all figured out having an LLC” would not help most comply.
Assemblywoman Lorena Gonzalez (D-San Diego), who authored AB5, said in February she was joining “more than a dozen assembly Democrats” in calling for a one-year exemption of the $800 tax for contractors who formed an LLC between September 2019 and December 2020.
AB85, the budget trailer bill Newsom signed, does something different. It waives the $800 tax for LLCs, limited partnerships and limited liability partnerships that first register with the Secretary of State in 2021, 2022 or 2023. (The legislative counsel’s digest at the top of the bill erroneously states the provision would take effect in 2020.)
California’s so-called LLC fee is by far the highest in the nation. Most states charge $100 or less.
State law also imposes an $800-a-year minimum franchise tax on corporations, but exempts them their first year. The new law was designed to give other business entities the same treatment, but only for three years starting next year.
It also requires the state to appropriate at least $1 each year to the Franchise Tax Board to cover the cost of administering the provision. That appropriation has been made for the first year, in the 2020-21 budget, according to the California Department of Finance.