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Understanding Franchise Tax: A Guide for Businesses

Updated: Feb 14

What is Franchise Tax?

Contrary to what the name might suggest, franchise tax has nothing to do with franchising in the traditional sense. Instead, it’s a tax levied on businesses for the privilege of operating in a particular state. Essentially, it’s a fee for the right to conduct business under the protection of the state’s laws and infrastructure. Included in this list are the states who impose a Business and Occupational Tax, similar to Franchise Tax and may be applied to all business entities.

Implications for Businesses

Franchise tax can have significant financial implications for businesses, especially for those operating in multiple states. It adds to the overall cost of doing business and must be factored into financial planning and budgeting. For some small businesses, particularly startups, franchise tax can be burdensome, especially if they are operating on thin profit margins. However, it’s essential to recognize that franchise tax helps fund essential state services and infrastructure. It contributes to the maintenance of roads, public schools, and other services that benefit businesses and residents alike.

Who Pays Franchise Tax?

Corporations: Both C corporations and S corporations are commonly subject to franchise tax in many states. Franchise tax for corporations is often based on factors such as net worth, capital, revenue, or income.

Limited Liability Companies (LLCs): Many states also impose franchise tax on LLCs. The tax calculation may be based on factors such as the LLC's revenue, net worth, or a flat fee.

Partnerships: Depending on the state, partnerships may also be subject to franchise tax. The tax may be levied on the partnership as a whole or on individual partners based on their distributive share of the partnership's income.

Limited Partnerships (LPs) and Limited Liability Partnerships (LLPs): LPs and LLPs may be subject to franchise tax in some states. The tax calculation may be similar to that of partnerships or LLCs.

Which States Impose a Franchise Tax?

Alabama: Alabama levies a business privilege tax, which is similar to a franchise tax, on corporations and LLCs.

Arkansas: Arkansas imposes a franchise tax on corporations and LLCs, based on their net worth or capital.

California: This tax is $800 for all California LLCs. The annual Franchise Tax is due the 15th day of the fourth month after the beginning of the tax year.

Delaware: Delaware charges an annual franchise tax on corporations incorporated in the state. The tax is based on the number of authorized shares a corporation has outstanding.

Georgia: Georgia imposes an annual net worth tax on corporations, which functions similarly to a franchise tax.

Illinois: Illinois levies an annual franchise tax on corporations and LLCs.

Kentucky: Imposes a Pari-Mutuel Tax on horse racing at all tracks conducting pari-mutuel wagering under the jurisdiction of the Kentucky Horse Racing Commission, as well as, a Local Occupational License taxes imposed on salaries, wages, commissions, and other compensation earned by persons within the tax district for work done and services performed or rendered in that jurisdiction. Compensation includes not only salaries and wages but also certain benefits.

Louisiana: Louisiana imposes a franchise tax on corporations and LLCs, based on their net worth or capital.

Mississippi: Mississippi imposes an annual franchise tax on corporations, based on their capital.

Missouri: Missouri franchise tax is paid by all corporations doing business in the state. Companies required to pay the tax must file Form MO-1120 or Form MO-1120S when paying their tax bill. Missouri has been collecting franchise tax from businesses since 1970.

Minnesota: Corporation Franchise Tax applies to companies that file annual federal income tax returns as C corporations and meet at least one of the following:

Located in Minnesota

Have a business presence in Minnesota

Have Minnesota gross income

New Hampshire: New Hampshire imposes a business profits tax and a business enterprise tax. The business profits tax is imposed on any enterprise, whether corporation, partnership, limited liability company, proprietorship, association, business trust, real estate trust, or other form of organization organized for gain or profit and carrying on any business in New Hampshire. Businesses with gross receipts under a certain amount are not required to file a business profits tax return.

New York: New York charges a franchise tax on corporations, which is based on the corporation's income.

North Carolina: North Carolina imposes an annual franchise tax on corporations, based on their capital.

Ohio: imposes a commercial activity tax (CAT) is an annual tax imposed on the privilege of doing business in Ohio, measured by gross receipts from business activities in Ohio.

Oklahoma: Oklahoma imposes a franchise tax on corporations, based on their capital.

Tennessee: Tennessee imposes a franchise tax on corporations and LLCs, based on their net worth or capital.

Texas: Texas imposes a franchise tax, often referred to as the "margin tax," on corporations, LLCs, and partnerships, based on their margin or revenue.

Vermont: The Bank Franchise Tax is paid by banks and other financial institutions with Vermont deposits. The tax is computed monthly on average monthly deposits for the previous 12 months. Tax is paid monthly, with a return filed quarterly. This tax is instead of corporate income tax.

Washington State: Imposes a Business and Occupation Tax on Gross Receipts with no deductions.

West Virginia: A Business and Occupation Tax is imposed on any persons(s) engaging or continuing with the state in any public service or utility business, except railroad, railroad car, express, pipeline, telephone and telegraph companies, water carriers by steamboat or steamship and motor carriers.

Washington, D.C.: Washington, D.C., imposes a franchise tax on corporations, LLCs, and other entities, based on their gross receipts.

It's essential for businesses to understand the specific requirements and rates of franchise tax in each state where they operate or are registered. Additionally, the laws and regulations regarding franchise tax can change over time, so it's advisable to stay informed by visiting the website of the Department of Revenue of the states you are conducting business in.

Understanding Franchise Tax: A Guide for Businesses
Understanding Franchise Tax: A Guide for Businesses