How an LLC Is Taxed — and the California LLC Fees Every Owner Should Know

Pathfinding Consultants | Business Tax Preparation | Orange County, CA | June 2026

Source: IRS Tax Topic 407 | IRS Publication 3402 | IRS — Forming a Corporation | California FTB Form 568 Tax Booklet (2025) | California FTB Publication 3556 | California FTB (R&TC §17942, §24271) | irs.gov | ftb.ca.gov

One of the most common misunderstandings a tax preparer runs into is the idea that an “LLC” is a single kind of tax entity. It is not. An LLC is a legal structure, and from a tax standpoint the IRS does not have an “LLC” tax category at all — it taxes your LLC based on how many members it has and what, if anything, it has elected. On top of that, if your LLC operates in California, the state adds its own costs that have nothing to do with your federal tax: the $800 annual franchise tax and the California LLC fee. This guide explains, from a tax preparer’s chair, how an LLC is actually taxed and what the California LLC fee structure looks like. Every point is drawn from IRS and California FTB sources. Pathfinding Consultants provides business tax preparation for Orange County LLC owners, and owners often find us searching tax firms near me once the California fees show up. Source: IRS Publication 3402; California FTB.

This blog is about how an LLC is taxed as an entity. If you are deciding whether to elect S-Corp treatment for your LLC, that is a separate question we cover in our companion guide: S-Corp vs LLC — Which Saves More in Taxes. Internal link: /post/s-corp-vs-llc-tax-comparison-2025.

An LLC Has No Tax Class of Its Own — the IRS Taxes It by Its Members

Here is the foundation a tax preparer starts from: the LLC is created under state law, but the IRS taxes it using its default classification rules based on the number of owners (members). The LLC itself, in most cases, does not pay federal income tax — the income passes through to the members. How that happens depends entirely on whether the LLC has one member or more than one. Source: IRS Publication 3402.

LLC Type	Default Federal Tax Treatment	Federal Form
Single-member LLC	Disregarded entity — taxed like a sole proprietor	Schedule C on the owner's Form 1040
Multi-member LLC	Partnership by default — pass-through to members	Form 1065 + Schedule K-1 to each member
LLC electing corporate status	Taxed as a C-corp or S-corp by election	Form 1120 or 1120-S (covered in our other guides)

Source: IRS Publication 3402, Taxation of Limited Liability Companies; IRS Tax Topic 407. An LLC can also elect to be taxed as a corporation or S corporation — that election, and whether it saves you money, is covered in our S-Corp guides rather than here.

Single-Member LLC: Taxed as a Disregarded Entity

If your LLC has one owner, the IRS treats it as a disregarded entity by default — meaning it is disregarded as separate from its owner for federal income tax. In plain terms, the LLC does not file its own federal income tax return; instead, a single-member LLC owned by an individual reports its business income and expenses on Schedule C, filed with the owner’s personal Form 1040, exactly as a sole proprietor would. Source: IRS Publication 3402; IRS Tax Topic 407.

What a single-member LLC owner actually pays

Because the income flows onto the owner’s personal return, a single-member LLC owner pays income tax at their individual rate on the net profit, and — because they are self-employed — self-employment tax on that profit as well. The “LLC” part does not change the federal income tax; it is the same Schedule C a sole proprietor files. This is the single most important thing for a new single-member LLC owner to understand about how they are taxed. Source: IRS Tax Topic 407.

Note for California: even though a single-member LLC is disregarded for federal income tax, California still treats it as a separate entity for the $800 annual tax, the LLC fee, and the Form 568 filing requirement. Source: California FTB Publication 3556.

Multi-Member LLC: Taxed as a Partnership

If your LLC has two or more members, the IRS taxes it as a partnership by default. The LLC files its own federal information return — Form 1065 — and issues each member a Schedule K-1 reporting their share of the income, deductions, and credits. The LLC itself still does not pay federal income tax; each member reports their K-1 share on their personal return and pays tax at their individual rate. Source: IRS Tax Topic 407; IRS Publication 3402.

The manager-managed vs. member-managed question — where it touches tax

Owners often ask whether being a manager-managed or member-managed LLC changes their taxes. From the tax chair, the honest answer is: the management structure itself does not change how the LLC is classified or taxed. Where it can matter is self-employment tax. A member who actively works in the business (a managing or active member) generally treats their distributive share as self-employment income, while a member who is more like a passive investor may be treated differently. This is a facts-and-circumstances area, and how a member’s share is treated for self-employment tax should be reviewed with a tax professional rather than assumed from the LLC’s management label. Source: IRS Tax Topic 407.

Source: IRS Tax Topic 407; IRS Publication 3402. In California, a multi-member LLC taxed as a partnership files Form 568 and is subject to the same $800 annual tax and LLC fee. Source: California FTB Form 568 Booklet.

Not sure how your LLC is being taxed?

Pathfinding Consultants prepares LLC returns for Orange County business owners — single-member and multi-member.

Book a consultation now.

Call: (949) 620-1036  ·  pathfindingconsultants.com

California’s $800 Annual Franchise Tax — Every LLC, Even at a Loss

Here is the California cost that surprises the most LLC owners, and the one a tax preparer flags immediately: every LLC doing business in or organized in California must pay an $800 annual minimum franchise tax. The California FTB is explicit — this tax is due even if the LLC is not conducting business and even if it operates at a loss, and it continues every year until the LLC is formally cancelled. It has nothing to do with whether the business made money. Source: California FTB.

• The $800 annual franchise tax applies to every California LLC, regardless of income or profit. Source: California FTB.

• It is paid with FTB Form 3522, generally due by the 15th day of the 4th month after the start of the tax year. Source: California FTB.

• First-year relief: an LLC that organizes or registers in California is generally not subject to the $800 tax for its first tax year. Source: California FTB.

• The $800 continues every year until the LLC files the paperwork to cancel with the Secretary of State and the FTB. Source: California FTB Publication 3556.

The California LLC Fee — the Extra Cost Above the $800

This is the part many LLC owners do not see coming, and it is separate from the $800. When a California LLC’s total California income reaches $250,000 or more, it owes an additional California LLC fee on top of the $800 franchise tax. The fee is tiered based on total California income, and — like the $800 — it is owed even if the LLC operates at a loss, because it is based on gross income, not profit. Source: California FTB (R&TC §17942, §24271).

California Total Income	LLC Fee (on top of the $800)
Less than $250,000		$0 — no fee
$250,000 – $499,999	$900
$500,000 – $999,999	$2,500
$1,000,000 – $4,999,999	$6,000
$5,000,000 or more	$11,790

Source: California FTB Form 568 Booklet (2025); R&TC §17942. “Total income” for the LLC fee is generally worldwide gross income plus cost of goods sold, apportioned to California — not net profit. If estimated total income will reach $250,000, the LLC must pay the estimated LLC fee using FTB Form 3536, generally by the 15th day of the 6th month of the tax year. Figures are set by the FTB and can change. Source: California FTB; R&TC §24271.

⚠  From the tax chair, the LLC fee is the number that catches growing California LLCs off guard. Because it is based on gross income and applies even in a loss year, a high-revenue, low-profit LLC can owe a substantial fee on top of the $800. This is worth planning for before the income year, not discovering at filing. Source: California FTB.

The Filing: California Form 568

A California LLC taxed as a partnership or a disregarded entity reports its income, the $800 annual tax, and the LLC fee on Form 568, the Limited Liability Company Return of Income. The FTB grants an automatic extension to file — but not to pay, so the $800 and any LLC fee are still due by the original deadline. Missing the filing or payment can lead to penalties, interest, and even suspension of the LLC’s right to do business in California. Source: California FTB Form 568 Booklet.

Source: California FTB Form 568 Booklet (2025); FTB Publication 3556. An LLC that has elected to be taxed as an S-corp or C-corp files the corporate return (Form 100S or Form 100) instead of Form 568 — another reason the election is a separate decision from how a default LLC is taxed. Source: California FTB.

California LLC fees catching you off guard?

Pathfinding Consultants handles the $800 tax, the LLC fee, and Form 568 for Orange County LLC owners.

Book a consultation now.

Call: (949) 620-1036  ·  pathfindingconsultants.com

LLC Tax at Pathfinding Consultants

Pathfinding Consultants provides business tax preparation and small business tax support for Orange County LLC owners. When owners search for tax firms near me to handle their LLC, here is how an enrolled agent firm handles the small business tax side:

• Classify it correctly — confirming whether your LLC is a single-member (disregarded), multi-member (partnership), or has elected corporate treatment, and filing the right return. Source: IRS Publication 3402.

• Prepare the federal return — Schedule C for a single-member LLC, or Form 1065 with Schedule K-1s for a multi-member LLC.

• Handle the California side — the $800 franchise tax, the tiered California LLC fee, and Form 568, filed and paid on time. Source: California FTB.

• Plan for the LLC fee — estimating the fee before the year ends so a growing LLC is not surprised by it. Source: California FTB.

• Enrolled agent, year-round — Pathfinding Consultants provides small business tax support throughout the year, not just at filing.

Get your LLC taxed and filed correctly — federal and California

Pathfinding Consultants provides business tax preparation for Orange County LLC owners.

Book a consultation now.

Call: (949) 620-1036  ·  pathfindingconsultants.com

Key Takeaways

• An LLC has no tax class of its own — the IRS taxes it by its number of members. Source: IRS Publication 3402.

• A single-member LLC is a disregarded entity — taxed like a sole proprietor on Schedule C of the owner's Form 1040. Source: IRS Tax Topic 407.

• A multi-member LLC is taxed as a partnership by default — files Form 1065 and issues a Schedule K-1 to each member. Source: IRS Tax Topic 407.

• Manager-managed vs. member-managed does not by itself change the LLC's tax classification; its main tax relevance is the self-employment-tax treatment of active vs. passive members. Source: IRS Tax Topic 407.

• California charges every LLC an $800 annual franchise tax — even at a loss, even with no income (first year generally exempt). Source: California FTB.

• California adds an LLC fee when total California income reaches $250,000+: $900 / $2,500 / $6,000 / $11,790 by income tier, based on gross income, owed even in a loss year. Source: California FTB; R&TC §17942.

• A default LLC reports the tax and fee on Form 568; extensions extend filing, not payment. Source: California FTB Form 568 Booklet.

• Source: IRS Tax Topic 407 | IRS Publication 3402 | California FTB Form 568 Booklet | California FTB Pub 3556 | R&TC §17942, §24271 — irs.gov | ftb.ca.gov

• Go deeper on electing S-Corp: S-corp & LLC Tax Comparision 2025 | Reasonable Compensation S-Corp Owners

IRS DISCLAIMER:

This blog is for general informational purposes only and does not constitute tax or legal advice. How an LLC is taxed depends on its members, its elections, and its specific facts, and California fees and thresholds change over time. Please consult a qualified tax professional about your LLC. For official IRS and California FTB guidance visit irs.gov and ftb.ca.gov.