Franchise Tax Explained: State-by-State Guide

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:

Authorized Shares Method - Based on the number of authorized shares in your certificate of incorporation, with a minimum of $175.

Assumed Par Value Capital Method - Based on total gross assets and issued shares, with a minimum of $400. This method often produces a far lower bill for startups that have many authorized shares but few assets.

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:

70 percent of total revenue - a flat option that requires no expense tracking.

Total revenue minus $1 million - a simple fixed deduction available to every filer.

Total revenue minus cost of goods sold - usually best for businesses with high product costs.

Total revenue minus compensation - usually best for labor-intensive businesses.

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:

New LLCs - The temporary first-year waiver under AB 85 expired at the end of 2023. LLCs formed on or after January 1, 2024 owe the $800 in their first taxable year.

New corporations - Corporations remain exempt from the $800 minimum in their first taxable year, with the minimum resuming in year two.

California LLCs also owe an additional gross-receipts fee once California-source total income reaches $250,000:

$250,000 to $499,999 - an extra fee of $900.

$500,000 to $999,999 - an extra fee of $2,500.

$1,000,000 to $4,999,999 - an extra fee of $6,000.

$5,000,000 and above - an extra fee of $11,790.

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:

Alabama - A business privilege tax based on net worth. As of 2024 the former $100 minimum was eliminated, so entities whose calculated tax is $100 or less owe nothing and need not file, while larger entities still pay the calculated amount.

Arkansas - A flat $150 annual franchise tax for LLCs. Corporations pay $300 if they have no authorized stock, or 0.3% of the value of outstanding capital stock with a $150 minimum. The annual report and tax are due May 1.

Mississippi - A franchise tax on capital that is being phased out. The rate per $1,000 of capital is $0.75 in 2025, $0.50 in 2026, and $0.25 in 2027, with full repeal scheduled for 2028. The first $100,000 of capital is exempt.

Louisiana - The corporate franchise tax has been repealed effective January 1, 2026, making the 2025 period the final one for which the tax applies.

Recent and Upcoming Changes

Franchise tax is an unusually active area of state law right now. Recent and scheduled changes include:

California in 2024 - The first-year $800 waiver for new LLCs expired, so new LLCs now pay from year one.

Tennessee in 2024 - The property measure was repealed and refunds were issued; the tax is now based on net worth only.

Texas in 2024 and after - The no-tax-due threshold roughly doubled to $2.47 million and the standalone No Tax Due Report was eliminated, with the threshold rising to $2.65 million for 2026.

Mississippi through 2028 - The franchise tax is stepping down each year toward full repeal in 2028.

Louisiana in 2026 - The corporate franchise tax is repealed, making 2025 the last year it applies.

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:

Wyoming - No franchise tax, no corporate income tax, and no personal income tax.

Nevada - No franchise tax and no corporate income tax, though a separate gross-receipts "Commerce Tax" applies to businesses with over $4 million in Nevada revenue.

South Dakota - No franchise tax and no corporate income tax.

Florida - No separate franchise tax, although it does levy a corporate income tax.

Montana - No separate capital-based franchise tax, although it does impose a corporate income tax.

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:

Choose the right calculation method - In states like Delaware that offer more than one method, compare them each year, since the Assumed Par Value Capital Method often beats the Authorized Shares Method for startups.

Right-size your authorized shares - In Delaware, do not authorize far more shares than you need, because the Authorized Shares Method scales with share count.

Pick your formation state deliberately - If you have no specific reason to incorporate in a high-tax state, consider one with no franchise tax, such as Wyoming or Nevada.

Watch revenue and liability thresholds - Staying below Texas's no-tax-due threshold, or under Illinois's $10,000 liability exemption, can mean owing nothing.

File and pay on time - Late franchise tax filings draw penalties and interest, and prolonged nonpayment can lead to administrative dissolution.

Dissolve or withdraw unused entities - If you hold entities in franchise tax states you no longer use, formally dissolve or withdraw them so the obligation stops accruing.

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.