Wait Until 2027 to Form Your California LLC? The $400 First-Year Tax, Explained

California just made the first year of a new LLC $400 cheaper — for a while. Buried in SB 122, the state's 2026–27 budget trailer bill, is a provision that cuts the first-year annual franchise tax from $800 to $400 for LLCs, limited partnerships, and LLPs whose first taxable year begins on or after January 1, 2027 and before January 1, 2030.

If you're planning a California LLC this fall, that raises an obvious question: should you wait until January? The honest answer is that for most businesses the $400 shouldn't drive the decision — but the mechanics matter, a December formation has a genuine trap in it, and most of what's been written about this law so far gets one important detail wrong. This is plain-English orientation, not legal or tax advice for your specific situation.

What SB 122 actually does#

SB 122 (Stats. 2026, ch. 23) was signed on June 29, 2026. Its franchise-tax provision adds new paragraphs to Revenue and Taxation Code sections 17935 (limited partnerships), 17941 (LLCs), and 17948 (LLPs). For LLCs, the operative language of section 17941(g)(2) reads:

“For taxable years beginning on or after January 1, 2027, and before January 1, 2030, every limited liability company required to file a return under Section 18633.5 shall, instead of the amount specified in Section 23153, pay the annual tax to this state in the amount of four hundred dollars ($400) for its first taxable year.”

A few things to notice in that sentence, because each one answers a question people are already getting wrong:

• It's a reduction, not an exemption. You still owe first-year annual tax — $400 of it. This is different from the 2021–2023 first-year exemption under AB 85, which waived the tax entirely and expired for entities formed on or after January 1, 2024.
• First taxable year only. Year two and every year after is the full $800, same as always.
• The window is 2027 through 2029. The reduction applies to first taxable years beginning on or after January 1, 2027 and before January 1, 2030. Unless the Legislature extends it, an LLC whose first taxable year begins in 2030 is back to $800.
• The trigger is when your first taxable year begins — not your filing date with the Secretary of State. Several CPA and formation-service write-ups paraphrase the rule as applying to entities that “register with the Secretary of State during 2027–2029.” That's usually the practical effect for a California-formed LLC, because a domestic LLC's first taxable year generally begins on the date the Secretary of State files its Articles of Organization. But the statute's test is the taxable year, which matters for out-of-state LLCs: a foreign LLC's first California taxable year can begin when it starts doing business in California or registers here — not when it was formed back home. (Whether an out-of-state LLC formed before 2027 that first registers or does business here during the window qualifies for the $400 is, like the 15-day question below, something the FTB hasn't addressed yet.)

One housekeeping note for anyone pulling the statute: the LLC paragraph was re-amended a few weeks after SB 122 passed. As originally chaptered, section 17941(g)(2) cross-referenced the wrong return section; SB 180 (Stats. 2026, ch. 85), a cleanup trailer bill effective July 13, 2026, corrected it to Section 18633.5. The current codified text is the version quoted above.

What SB 122 does not change#

• The $800 in year two and beyond. The reduction is a first-year welcome discount, not a rate cut.
• The income-based LLC fee. Revenue and Taxation Code section 17942 — the tiered fee that starts at $900 once total California income reaches $250,000 — is untouched. A 2027 LLC that has a strong first year pays $400 in annual tax plus the applicable fee.
• Due dates and forms. The first-year payment is still due by the 15th day of the 4th month of the first taxable year (counting the formation month), still paid with FTB Form 3522. As of early October 2026, the FTB has acknowledged the change on its legislative-changes page, but the 2027 Form 3522 and instructions haven't been released yet.
• Everything else about forming an LLC. The $70 Articles of Organization fee, the $20 initial Statement of Information, and the rest of the formation checklist are unchanged.

Also worth knowing if you're choosing between an LLC and a corporation: new California corporations have had a permanent exemption from the $800 minimum franchise tax for their first taxable year since 2000 (Revenue and Taxation Code section 23153(f)(1)) — though they still pay franchise tax measured by income for that year. SB 122 doesn't change the corporate rule; it just narrows the first-year gap between the two entity types for 2027–2029.

The December trap — and the 15-day rule#

Here's where timing genuinely matters. A domestic LLC's first taxable year generally begins on the date the Secretary of State files its Articles. So:

• Form in early-to-mid December 2026: your first taxable year begins in 2026 — outside the window. You owe the full $800 for a first “year” that might be three weeks long, and then the full $800 again for 2027, due April 15. That's the classic back-to-back payment trap, now with a $400 missed discount stacked on top.
• Form on January 2, 2027: your first taxable year begins in 2027. First-year tax: $400, due by the 15th day of the 4th month of the taxable year — April 15, 2027 for a January formation.

There's a wrinkle for the last two weeks of December: California's 15-day rule (Revenue and Taxation Code section 17946). An LLC whose first taxable year is 15 days or less and that conducts no business in that stretch isn't subject to the annual tax for that short year at all. Under the expired AB 85 exemption, the FTB treated such an LLC's first taxable year as beginning January 1 of the following year. Whether the FTB will apply the same logic to SB 122 — so that a late-December 2026 formation qualifies for the $400 — is an open question the FTB hasn't answered yet. If you're eyeing that window, the conservative move is simply to wait the extra two weeks and file in January; the aggressive move needs a conversation with your CPA first.

So — should you wait?#

If you're reading this in October or November 2026 and the only reason to form now is momentum, waiting until January costs you little and saves you $400 plus the back-to-back payment squeeze. For a business that won't really operate until the new year anyway, January formation is the cleaner answer on every axis.

But if your business is already operating — or will be before January — the math changes, because the cost of waiting isn't zero. It's just not a line item on a tax form:

• You're personally exposed in the meantime. Until the LLC exists, you're operating as a sole proprietor (or a general partnership, if there are two of you — a structure with unlimited joint liability that most co-founders don't realize they're in). Every contract signed, every client engagement, every delivery made before formation is a personal-liability event the LLC can't retroactively absorb.
• Contracts, leases, and accounts need the entity. If you need to sign a lease, open a business bank account, onboard a major client, or put an agreement in the company's name this quarter, the entity has to exist first. Redoing paperwork in January costs more than $400 of anyone's time.
• Your name isn't reserved by intention. LLC names are claimed by filing. If the name matters, months of waiting is months of exposure. (A name reservation is available, but it's one more filing and it expires.)
• Co-founder terms shouldn't wait on a tax discount. If there are two or more of you, the operating agreement — capital, votes, exits — is the thing that actually protects you. Handshake-period months are where co-founder disputes are born.

The pattern we'd suggest: let the business timeline drive the formation date, and let the $400 break the tie. Starting in Q1? Form in January and take the $400. Operating now, with real contracts and real exposure? Form now; the $800 is the cost of having the entity in place for the months that matter. In the late-December gray zone, wait the two weeks.

Common questions#

Does the $400 apply to existing LLCs? No. It applies only to an entity's first taxable year, and only when that first taxable year begins in 2027, 2028, or 2029. An LLC formed in 2025 or 2026 pays $800 every year, including 2027.

Does it apply to corporations? No — but corporations don't need it. New California corporations are already exempt from the $800 minimum franchise tax for their first taxable year under a permanent rule; they pay tax measured by income for that year instead. SB 122's reduction covers LLCs, limited partnerships, and LLPs.

Is there an income cap or small-business limit? No. The operative text applies to every qualifying LLC, LP, and LLP regardless of size or revenue. (For LLCs, “qualifying” means those taxed as partnerships or disregarded entities — an LLC that elected corporate taxation follows the corporate rules instead, including the existing corporate first-year exemption.)

Do I still owe the income-based LLC fee? Yes, if your total California income reaches $250,000 — the section 17942 fee (starting at $900) is separate from, and unaffected by, the $400 first-year rate.

What happens after 2029? The reduction sunsets: first taxable years beginning on or after January 1, 2030 are back to $800 unless the Legislature acts again.

If I form in late December 2026 and do no business, do I get the $400? Unresolved. The 15-day rule means a late-December, no-activity formation owes nothing for the 2026 short year — but whether the FTB will treat the first taxable year as beginning January 1, 2027 (and therefore inside SB 122's window) hasn't been addressed in any published guidance yet. Ask your CPA, or wait the two weeks and remove the question.