What Is Franchise Tax?
Despite its name, franchise tax has nothing to do with owning a franchise. A franchise tax is a fee that certain states charge businesses for the privilege of being incorporated or organized in the state, or for the privilege of doing business there. It is essentially the cost of keeping your legal entity in good standing in a given jurisdiction.
Franchise tax is separate from income tax. A business can owe franchise tax even if it earns no revenue or operates at a loss, which catches many owners off guard, particularly those who form entities in states like Delaware, Texas, or California without budgeting for the ongoing obligation.
The rules, rates, and thresholds below are current as of 2026. Franchise tax laws change frequently from year to year, so always confirm the latest figures with the state agency or your accountant before you file.
Which States Charge Franchise Tax?
Not every state imposes a franchise tax, and the states that do calculate it in very different ways - some on net worth or capital, some on revenue, and some as a flat annual fee. Here are the most significant franchise tax states.
Delaware
Delaware imposes an annual franchise tax on every corporation incorporated in the state. Corporations can calculate the tax two ways and pay the lower result:
Most corporations are capped at $200,000, although a small number of very large "Large Corporate Filers" can owe up to $250,000. Corporations with millions of authorized shares that do not use the Assumed Par Value method can see surprisingly large bills, which is why the calculation method matters so much. Delaware LLCs, LPs, and general partnerships instead pay a flat $300 per year regardless of revenue or assets. The corporate franchise tax and annual report are due March 1; the LLC and LP flat tax is due June 1.
Texas
Texas imposes a franchise tax, often called the "margin tax," on most entities doing business in the state. Businesses with annualized total revenue at or below the no-tax-due threshold owe no franchise tax. That threshold is $2.47 million for 2025 reports and rises to $2.65 million for 2026 reports, because it is adjusted for inflation every two years.
Above the threshold, the tax is calculated on the lowest of several margin options:
The rate is 0.375% for retail and wholesale businesses and 0.75% for most other businesses, with a simplified "E-Z" computation at 0.331% available to businesses with $20 million or less in total revenue. Note that the $1 million figure (a margin-deduction option) and the $2.47 million / $2.65 million figure (the no-tax-due threshold) are two different things. As of 2024, businesses below the no-tax-due threshold no longer file a separate "No Tax Due Report," but they must still file a Public Information Report or Ownership Information Report each year.
California
California imposes an $800 annual minimum franchise tax on corporations and an $800 annual tax on LLCs, due whether or not the business earns any income. The first-year rule recently changed and is a common source of confusion:
California LLCs also owe an additional gross-receipts fee once California-source total income reaches $250,000:
New York
New York's corporate franchise tax is calculated on the highest of three bases: a business income base, a business capital base, or a fixed-dollar minimum. The fixed-dollar minimum is tied to New York receipts and ranges from $25 for the smallest companies up to $200,000 for the largest. New York kept its business capital base after initially planning to phase it out, so capital-intensive companies should not assume that base has gone away.
Tennessee
Tennessee recently simplified its franchise tax. Legislation enacted in 2024 (Public Chapter 950) repealed the alternative "property measure," so for tax years ending on or after January 1, 2024 the tax is based only on apportioned net worth. The rate is $0.25 per $100 of net worth (0.25%), with a $100 minimum. The state also issued refunds to businesses that had paid under the now-repealed property measure in prior years.
Illinois
Illinois still charges a franchise tax on paid-in capital, administered by the Secretary of State rather than the Department of Revenue. A planned phase-out that would have eliminated the tax by 2024 was reversed before it completed, so the tax remains in effect. As of 2025, the first $10,000 of franchise tax liability is exempt, which eliminates the tax for many smaller companies while leaving it in place for larger ones.
Other Franchise Tax States
Several more states impose franchise, privilege, or capital-based taxes:
Recent and Upcoming Changes
Franchise tax is an unusually active area of state law right now. Recent and scheduled changes include:
These are exactly the kind of details that are easy to miss when you operate in multiple states, and getting them wrong means either overpaying or falling out of compliance.
States with No Franchise Tax
Many states impose no franchise tax at all, including:
This is one reason states like Wyoming and Nevada are popular choices for entity formation. For more, see our guide on Wyoming LLC advantages.
How to Minimize Your Franchise Tax
You cannot avoid franchise tax entirely if you are registered in a state that charges one, but you can keep the cost down:
Franchise Tax vs. Income Tax
Franchise tax and income tax are separate obligations, and many states charge both. Franchise tax is a charge for the privilege of existing or doing business in the state, while income tax is a charge on the profits you earn there. A business operating at a loss may owe zero income tax yet still owe franchise tax, which is exactly why the franchise obligation surprises so many owners.
Frequently Asked Questions
Do I owe franchise tax if my business made no money?
Often yes. Franchise tax is typically based on net worth, capital, authorized shares, or a flat minimum rather than profit, so states like California (the $800 minimum) and Delaware can bill you even in a year with no revenue.
Is franchise tax the same in every state?
No. Some states have no franchise tax, some charge a flat fee, and others base it on revenue, capital, or net worth. The same company can owe very different amounts depending on where it is formed and where it does business.
What happens if I do not pay?
Unpaid franchise tax accrues penalties and interest and can cause your entity to lose good standing. Prolonged nonpayment can lead the state to administratively dissolve or revoke your entity, which can put your liability protection at risk.
Do I owe franchise tax in more than one state?
Possibly. You generally owe it in your formation state and in any state where you are registered to do business as a foreign entity. Operating across several states can mean several franchise tax obligations, each with its own rules and deadlines.
How CLS Can Help
CLS monitors your compliance obligations in every state where your business is registered, including franchise tax deadlines and the frequent rule changes covered above. Our compliance dashboard tracks upcoming deadlines and sends proactive reminders so you never miss a payment. Combined with our registered agent services and annual report filing support, we provide a complete compliance solution. Contact us for a free consultation.