Franchise Tax
Overview
Franchise tax is a state-level tax imposed on businesses for the privilege of operating within that state. Despite the name, it is not related to business franchises (like fast-food chains), but instead applies to a wide range of business entities, including corporations, LLCs, and partnerships, depending on the state.
Purpose
The franchise tax is a fee for the right to exist as a legal entity and conduct business within a specific jurisdiction. It is a privilege tax, not based on income, and is separate from state or federal income tax.
Who Must Pay Franchise Tax
- Corporations (C-corps, S-corps)
- Limited Partnerships (LPs)
- Net worth or capital stock
- A flat fee or minimum tax
- Limited Liability Companies (LLCs)
- Certain other business entities
- Gross receipts or revenue
- Franchise Tax is a Fee
Certain other business entities
How It's Calculated
The calculation method depends on the state and may be based on:
Gross receipts or revenue
Delaware calculates franchise tax based on the number of authorized shares or the assumed par value capital method.
Net worth or capital stock
Texas bases it on the company’s margin (total revenue minus certain deductions).
Key Takeaways
Franchise tax is not a federal tax, and not based on profits
Obligatory even for inactive or loss-making companies
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