Franchise Tax

What is franchise tax?

Franchise tax is a state tax on businesses for the privilege of operating or being organized in that state. Despite the name, it applies to all types of businesses, not just franchises. Calculation methods vary by state: some base it on net income, others on capital or net worth, and some charge flat fees. Texas, California, and Delaware are notable franchise tax states.

State variations

Texas charges margin tax based on revenue minus certain deductions. Delaware charges based on authorized shares or assumed par value. California imposes an $800 minimum franchise tax on LLCs and corporations. Some states exempt small businesses below revenue thresholds. Know your obligations in each state where you are registered or doing business.

Franchise tax vs income tax

Franchise tax is separate from state income tax, and you may owe both. Some states have one or the other. Texas has franchise tax but no income tax. California has both. Ohio uses commercial activity tax instead. Failing to pay franchise tax can result in administrative dissolution of your entity, losing your liability protection. Take these obligations seriously.