What Is Franchise Tax?
Despite its name, franchise tax has nothing to do with owning a franchise. A franchise tax is a tax that certain states charge businesses for the privilege of being incorporated or organized in that state, or for the privilege of doing business in that state. It is essentially the cost of maintaining your legal entity in a given jurisdiction.
Franchise taxes are separate from income taxes. A business may owe franchise tax even if it earns no revenue or operates at a loss. This catches many business owners off guard, particularly those who form entities in states like Delaware or Texas without fully understanding the ongoing tax obligations.
Which States Charge Franchise Tax?
Not all states impose a franchise tax. The states that do charge one vary significantly in how they calculate the tax and how much they charge. Here is an overview of the most notable franchise tax states:
Delaware
Delaware imposes an annual franchise tax on all corporations incorporated in the state. The tax can be calculated using two methods:
Delaware LLCs pay a flat annual tax of $300 regardless of revenue or assets.
Texas
Texas imposes a franchise tax (called the Texas Margin Tax) on most businesses operating in the state. The tax is calculated based on the business's total revenue, with several calculation options:
The tax rate is 0.375% for retail and wholesale businesses and 0.75% for all other businesses.
California
California imposes an annual minimum franchise tax of $800 on LLCs, corporations, and limited partnerships. This tax is due regardless of whether the business earns any income. First-year entities are exempt from the minimum tax in their initial tax year, but the tax applies starting in the second year.
Additionally, California LLCs with total income over $250,000 owe an additional LLC fee ranging from $900 to $11,790.
New York
New York imposes a franchise tax on corporations based on the highest of four calculation bases: business income, business capital, fixed dollar minimum based on receipts, or a fixed dollar minimum amount. The minimum tax ranges from $25 to $200,000 depending on the company's New York receipts.
Other States with Franchise Tax
Several other states impose franchise taxes of varying types and amounts, including:
States with No Franchise Tax
Many states do not impose a franchise tax, including:
This is one reason why states like Wyoming and Nevada are popular choices for entity formation. For more on Wyoming's advantages, see our guide on Wyoming LLC advantages.
How to Minimize Your Franchise Tax
While you cannot avoid franchise tax entirely if you are registered in a state that charges one, there are strategies that can help reduce your burden:
Franchise Tax vs. Income Tax
It is important to understand that franchise tax and income tax are separate obligations. Many states charge both. Franchise tax is a tax on the privilege of existing or doing business in the state, while income tax is a tax on the profits earned in the state. A business that operates at a loss may owe zero income tax but still owe franchise tax.
How CLS Can Help
CLS monitors your compliance obligations in every state where your business is registered, including franchise tax deadlines. Our compliance dashboard tracks all 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.