What California Form 568 Is For
California Form 568 (2016) is the return LLCs use when they are taxed as partnerships or as disregarded entities. These LLCs are treated as pass-through entities, so the LLC itself generally does not pay income tax on earnings. Instead, income, deductions, and credits pass through to members, who report their share on their own individual income tax return.
Form 568 reports the LLC’s business activity for the year, calculates the mandatory $800 annual tax, determines whether the LLC owes the income-based LLC fee, and handles withholding for nonconsenting nonresident members when required. It also produces Schedule K-1 (568) for each member, summarizing that member’s share of income, deductions, credits, and other items.
When You’d Use California Form 568
LLCs must file Form 568 if they are doing business in California, registered or organized in the state, or earning California-source income. For the 2016 tax year, LLCs classified as partnerships file by March 15, 2017. Single-member LLCs owned by individuals or corporations usually file by April 15, 2017. California automatically grants a six-month filing extension, but this does not extend time to pay the annual tax, LLC fee, or any required withholding.
You must file late or amended returns when deadlines are missed or information changes. Late filing triggers penalties of $18 per member per month (up to 12 months), plus penalties on any unpaid tax. You must amend your return if you discover errors or if the IRS later adjusts your federal filing. Amended K-1s must also be issued to all affected members.
Key Rules or Details for 2016
Who Must File
Any LLC not electing corporate taxation must file Form 568 if it meets at least one condition: it operates in California, is formed or registered in the state, or has California-source income. A short-year LLC of 15 days or less with no business activity is typically exempt.
Annual $800 LLC Tax
Every California LLC must pay the $800 tax for the privilege of doing business in the state. This payment is due by the 15th day of the fourth month of the taxable year (April 15, 2016, for calendar-year LLCs). Use Form FTB 3522 to submit this payment separately from the return. Newly formed LLCs must pay within four months of registration.
The LLC Fee
LLCs must pay an additional fee if total California income meets or exceeds $250,000. For 2016, the fee ranges from $900 to $11,790 depending on income brackets. The fee is based solely on California-source income. Estimated fee payments are due by the 15th day of the sixth month on Form FTB 3536. Underpayment results in a 10% penalty unless the estimate is at least equal to the prior year's fee.
California-Federal Differences
California conforms to the Internal Revenue Code as of January 1, 2015. Many federal tax updates after that date—such as bonus depreciation and certain business deductions—do not apply for California purposes. LLCs must adjust their California income accordingly on Form 568.
Schedule K-1 (568) Requirements
LLCs must issue a Schedule K-1 to every member by the return due date. A copy of each K-1 must also be attached to the filed Form 568. Missing or incomplete K-1s can result in penalties and filing delays.
Suspension or Forfeiture
LLCs that fail to file or pay required amounts risk suspension (domestic LLCs) or forfeiture (foreign LLCs). During this period, the LLC loses legal rights, including the ability to enforce contracts. Restoring good standing requires filing all overdue returns and paying all outstanding taxes, fees, and penalties.
Step-by-Step (High Level)
Step 1: Confirm Filing Requirement
Identify whether your LLC must file based on registration, business activity, or California-source income.
Step 2: Pay the Annual $800 Tax
Submit the annual tax using Form FTB 3522 by the 15th day of the fourth month of your taxable year. This payment is due even if the LLC has no income.
Step 3: Estimate and Pay the LLC Fee
By the 15th day of the sixth month, estimate total California income and pay the corresponding fee using Form FTB 3536.
Step 4: Gather Records
Collect federal Form 1065 (if applicable), financial statements, and documentation supporting income and deductions.
Step 5: Complete Form 568
Enter gross receipts, deductions, credits, and adjustments. Use Schedule IW to calculate total California income for LLC fee purposes.
Step 6: Prepare Schedule K
Summarize the LLC’s total distributive items that flow to members, including income, deductions, and credits.
Step 7: Prepare Schedules K-1 (568)
Prepare a separate K-1 for each member. List ownership percentages in four-decimal format (e.g., 33.5432), and ensure all fields are complete.
Step 8: Reconcile Totals
Confirm that all K-1 amounts align with Schedule K and that the number of members matches what is reported on Form 568.
Step 9: File the Return
Submit Form 568 with attached K-1s by the deadline. E-filing is required when using tax software. Provide each member with their K-1 promptly.
Common Mistakes and How to Avoid Them
- Missing K-1s – Attach complete K-1s for every member and verify IDs and addresses.
- Incorrect ownership percentages – Use decimal format only. Avoid percentages or phrases like “Various.”
- Schedules not reconciling – Ensure that total distributive items match across schedules.
- Paying the annual tax late – Use Form FTB 3522 and pay by the fourth month’s deadline.
- Underpaying the LLC fee – Estimate carefully or use the prior year's fee as a safe harbor.
- Missing amendments – Check the amended-return box on Form 568 and each K-1 when correcting filings.
- Ignoring federal changes – File a California amendment within six months of a final IRS determination.
What Happens After You File
The FTB reviews your return for completeness and matches amounts against federal filings and prior-year data. If discrepancies appear—such as missing K-1s, mismatched totals, or unpaid fees—your LLC may receive a notice or billing statement.
California generally has four years from the original due date or filing date to assess additional tax. This window extends if the IRS audits or adjusts your federal return. Suspended or forfeited LLCs must clear all obligations before they regain legal standing. After filing, you must provide Schedules K-1 to all members so they can complete their own individual income tax return. Good recordkeeping is essential, especially for operating agreements, financial statements, and tax payment records.
FAQs
What’s the difference between the $800 annual tax and the LLC fee?
The annual tax is a flat $800 charge for the privilege of doing business in California. The LLC fee is based on California-source income and applies only when income is at least $250,000.
When is the $800 annual tax due?
It’s due by the 15th day of the fourth month of the taxable year. For calendar-year LLCs, this is April 15, 2016. Newly formed LLCs must pay within four months of registering.
Can I e-file Form 568?
Yes. If software is used to prepare the return, e-filing is required. Payments can be made using Web Pay, credit card, or electronic withdrawal.
What happens if I underpay the estimated LLC fee?
A penalty of 10% applies to the underpayment unless the estimate equals or exceeds the prior year’s fee.
What are the penalties for filing late or incomplete?
Penalties include $18 per member per month (up to 12 months), a 5% monthly late-filing penalty on unpaid tax (capped at 25%), and additional failure-to-pay penalties plus interest.
Do I need to amend if the IRS changes my federal return?
Yes. You must file an amended Form 568 within six months and include the IRS report detailing the changes.
What does suspension or forfeiture mean for an LLC?
It means the LLC loses legal rights and privileges. Contracts made during suspension or forfeiture are voidable, and the LLC cannot enforce them until fully reinstated.
