Franchise tax guide summary
- Franchise tax is an annual state-level tax or fee charged to LLCs, corporations, and other business entities for the privilege of doing business in a state.
- Unlike income tax, franchise tax is generally owed regardless of whether a business earns a profit.
- Not all states impose a franchise tax, and calculation methods vary by state.
- Businesses may owe franchise tax in multiple states if they are registered to do business in more than one.
- Missing franchise tax payments or filings can lead to penalties, interest, loss of good standing, or administrative dissolution.
What is franchise tax?
Franchise tax is an annual state-level tax or fee charged to LLCs, corporations, and other business entities for the privilege of doing business in a state. Despite the name, it has nothing to do with owning a franchise business. It’s one of several LLC taxes to plan for.
Unlike income tax, franchise tax is generally owed whether a business makes a profit, breaks even, or operates at a loss. It is typically considered a cost of maintaining a business’s legal status within a state.
Not all states impose a franchise tax. Some charge a flat annual amount, while others calculate it based on revenue, assets, net worth, or capital. Several states charge only an annual report fee instead.
Businesses that fail to pay required franchise taxes may face penalties, interest, loss of good standing, or even administrative dissolution, depending on state law.
Franchise tax vs. income tax: what’s the difference?
It’s easy to confuse franchise taxes with income taxes because both are government charges related to your business. However, franchise tax is very different from income tax in how it’s calculated and why it’s charged.
| Item | Franchise tax | Income tax |
|---|---|---|
| Based on | A flat amount, revenue, net worth or capital | Profit |
| Owed with no profit? | Usually yes | No |
| Who charges it | States only | Federal government and most states |
| Who pays for a default LLC | The LLC | The owners, on their personal returns |
Basis of tax
Income tax is based on your business’s profits, essentially how much money your LLC earned after expenses. If your LLC doesn’t make a profit, there’s generally no income tax on the business. In contrast, franchise tax is not based on profit. It’s often a flat amount or based on some measure of your business’s size (like revenue, assets, or capital) set by the state. Whether you make a profit, break even, or lose money, you may still owe a franchise tax.
Purpose
Income taxes (state and federal) are taxes on income earned. Franchise taxes are more like an operating fee, a cost for the privilege of maintaining a business entity in the state. Some states call it a “privilege tax” or an annual fee instead of franchise tax. It’s the state’s way of saying that if you want the benefits of an LLC (like limited liability) there, there’s an annual charge for that.
Who collects it
Income tax can be collected by the federal government (IRS) and by states. For LLCs, federal income tax is usually paid through the owners’ personal tax returns, since most LLCs are pass-through entities. Franchise tax, on the other hand, is levied only by states, and there’s no federal franchise tax. You pay it to the state where your LLC is registered or doing business, through its tax agency or Secretary of State.
Timing and frequency
You typically calculate and pay income taxes annually when you file returns (by April 15 for federal individual returns, with quarterly estimates for many owners). Franchise taxes are usually paid annually as well, often by a set date each year, such as March 15, April 15, May 15 or June 1, depending on the state. Unlike income tax, franchise tax doesn’t follow one standard set of brackets or rates, because it varies widely by state law.
Obligation regardless of profit
Perhaps the biggest practical difference is this. If your LLC has no income or a loss, you owe $0 in income tax. But you still owe the franchise tax in states that have one. For example, a California LLC that hasn’t started making sales still owes the $800 minimum annual tax each year, and a Texas LLC with no tax due still has to file its annual Public Information Report.
In short, income tax depends on your profitability, while franchise tax is a cost of maintaining your LLC’s legal status. When planning your finances, think of franchise tax as a fixed or base cost, whereas income tax will fluctuate based on how your business performs.
Who needs to pay franchise tax?
If you’ve formed an LLC (or any formal business entity) in a state that has a franchise tax, you are likely required to pay it. These businesses generally pay where it applies.
- Domestic LLCs and corporations: if your LLC is formed in a state with a franchise tax (like Delaware or California), that state will charge you each year. This applies to single-member and multi-member LLCs alike, though some states exempt certain entity types.
- Foreign LLCs registered to do business in the state: if your LLC was formed elsewhere but you registered in another state as a foreign LLC, that state will often treat you the same as a local LLC for franchise tax. For example, if you formed your LLC in Delaware but registered to operate in California, you’ll pay Delaware’s LLC tax and California’s annual tax.
- Other formal entities: corporations, limited partnerships (LPs) and similar entities also often pay franchise taxes. The rates or calculations might differ, and in some states (such as Mississippi) the tax applies to corporations and to LLCs only if they’re taxed as corporations.
You generally do not pay franchise tax if you haven’t formed an official business entity. A sole proprietorship or a general partnership usually doesn’t pay franchise tax because it’s not a registered entity. Operating without an LLC avoids the franchise tax, but at the cost of having no liability shield.
Some types of organizations, typically nonprofits and certain passive entities, are exempt from franchise tax in various states. But for the vast majority of small businesses operating as LLCs, plan on owing a franchise tax each year if your state has one.
Finally, whether or not you owe any money, you may still have to file franchise tax forms or reports. Some states set a revenue threshold below which your LLC owes $0 franchise tax, effectively exempting very small businesses from paying. However, you might still need to file a report. It pays to know the rules, because not filing required paperwork can lead to penalties even if no tax was due.
State franchise tax obligations for LLCs
Franchise tax is imposed at the state level, which means the rules, rates, and filing requirements vary depending on where your business is registered or operates.
Some states charge a flat franchise tax, while others calculate it based on revenue, capital, net worth, or other financial measures.
| State | Franchise tax requirement | How it’s calculated |
|---|---|---|
| Alabama | Business privilege tax | Based on Alabama net worth; no tax or return if it’s $100 or less |
| Arkansas | Franchise tax | Flat $150 a year for LLCs |
| California | Annual LLC tax | $800 minimum (reduced to $400 for an LLC’s first taxable year from 2027 to 2029), plus an LLC fee once California gross receipts reach $250,000 |
| Delaware | Annual LLC tax | Flat $300 a year |
| Mississippi | Franchise tax | Only for LLCs taxed as corporations; based on capital |
| New York | Annual LLC filing fee | $25 to $4,500, based on New York-source gross income |
| Tennessee | Franchise tax | 0.25% of net worth, $100 minimum |
| Texas | Franchise (margin) tax | Based on taxable margin; no tax due below $2.65 million in revenue (2026–2027) |
Because franchise tax laws change, always verify current requirements with the state agency before you file.
How franchise tax works in major states
While franchise tax rules differ across the country, California, Delaware, New York, and Texas are among the most commonly discussed states because of their unique requirements and popularity among business owners.
California
Every California LLC pays an $800 minimum annual tax regardless of income, profitability, or business activity. For an LLC’s first taxable year from 2027 to 2029, it’s reduced to $400. LLCs with California gross receipts of $250,000 or more also pay an annual LLC fee.
Delaware
If you form an LLC in Delaware, the state charges a flat $300 annual tax on LLCs, due June 1. The amount doesn’t vary with revenue or profitability.
New York
New York does not call its LLC charge a franchise tax. Instead, a New York LLC with New York income pays an annual filing fee based on its prior-year New York-source gross income, ranging from $25 to $4,500. A single-member LLC that’s a disregarded entity pays a flat $25.
Texas
Texas uses a franchise tax based on revenue and margin rather than a flat annual amount. An LLC in Texas with revenue at or below the no-tax-due threshold ($2.65 million for 2026 and 2027) doesn’t owe franchise tax, but it still files a Public Information Report each year, due May 15.
Tips for LLC owners on franchise tax compliance and planning
Facing franchise taxes might sound like a hassle, but with a bit of planning it becomes just another routine part of business, much like renewing your website domain or business insurance each year. These tips help you manage your LLC’s franchise tax smoothly.
Know your state (or states)
First, research whether your state has a franchise or annual tax for LLCs, and what it’s based on. It ranges from flat amounts (Delaware, California) to revenue-based (Texas) to income-based fees (New York). Check your state’s official business or tax agency website for “LLC annual tax” or “franchise tax.” If you’re registered in more than one state, repeat this for each. Make a list of each state’s requirements so nothing slips through the cracks.
Mark your calendar
Deadlines vary, for example March 15 (New York LLC fee for calendar-year LLCs), April 15 (California annual tax), May 15 (Texas franchise report) and June 1 (Delaware LLC tax). Missing a deadline can mean penalties, late fees, or worse. Use a digital calendar, project management tool, or planner to mark these dates well in advance. Set reminders a month before, a week before, and on the due date, so you have time to gather funds and file on time. You can track them alongside your annual report.
Budget for the tax
Treat the franchise tax like a fixed overhead expense of your LLC. Include it in your annual budget or bookkeeping software as a recurring expense. For example, if you’re in California, you know you need to have $800 ready each year. It can help to set aside a small amount each month (about $67 a month for the $800 California tax) so it’s not a large hit at once.
Stay in good standing
Paying the franchise tax is often tied to your business’s good standing in the state. Falling behind can lead to your LLC losing good standing or even being administratively dissolved or forfeited. That can snowball: you might not be able to secure financing, enter contracts, or file lawsuits until it’s resolved. It’s much easier to pay the tax or file the required report than to reinstate your LLC later. See how to keep your LLC in good standing for the other requirements.
Use automated tools or services
Consider using compliance services (many registered agent services send compliance reminders), or set up online payments where your state allows them. Delaware, for instance, lets you pay online, so you can pay as soon as the window opens. Some business owners also delegate this to their accountant or bookkeeper. Find a system that works for you so it doesn’t rely on memory.
Consider timing and structure
When planning a new LLC, timing can save money. In California, an LLC formed late in the year can owe the annual tax for that short first year and again for the next year within a few months. One exception is a first tax year of 15 days or less in which the LLC does no business. Ask a tax professional whether forming after January 1 makes sense for you. Also, if an LLC is no longer needed, properly dissolving it with the state stops future franchise tax from accruing.
Understand exemptions or elections
In some cases, changing your tax election affects franchise taxes. For instance, New York exempts LLCs that elect to be taxed as corporations from the LLC filing fee, because they fall under corporate tax rules instead. That’s not a reason to rush into corporate taxation (it has its own pros and cons), but it’s good to know the interactions. Texas, for its part, treats certain passive entities as not subject to franchise tax. Make sure you’re not missing an exemption your business qualifies for.
Keep records of filing
After you pay your franchise tax or filing fee, save proof of payment and any filed report. If the state ever makes an error, you’ll want your receipt. Many states also issue a certificate of good standing you can request once you’re paid up, which is a quick way to confirm everything’s in order.
Consult a professional if unsure
Franchise taxes can be nuanced, especially if your business operates in multiple states or you’re near a threshold. A quick chat with a CPA or business attorney can clarify your obligations. Professionals can also help you plan, for example by advising which state to register in first or how to reduce taxes legally as you expand.
Example scenarios
To put it all together, here are two contrasting scenarios.
Scenario 1: the coast-to-coast e-commerce LLC
Maria forms her LLC in Delaware (attracted by the $300 flat tax), but she lives in California and sells nationwide online. She registers her Delaware LLC in California as a foreign LLC. Now, each year she pays Delaware $300 and California $800. That’s $1,100 in franchise taxes and fees for the privilege of doing business in those two states. If she had formed only in California, she’d pay $800. Operating in California without registering there would break California law, so she complies with both. Maria decides the Delaware advantages are worth the extra $300, and she makes sure her pricing and budget cover these costs. She sets a calendar alert for April (California) and another for May (to prepare for Delaware’s June 1 deadline).
Scenario 2: the growing Texas startup
John runs a small software LLC in Texas. In his first couple of years, revenue is under $1 million. He owes $0 in Texas franchise tax thanks to the no-tax-due threshold, though he files his Public Information Report each May. By year 3, his app takes off and revenue hits $5 million. Now he must calculate and pay Texas franchise tax, which could be in the range of $16,000 to $26,000 depending on how his margin is calculated. That’s a new expense he plans for. John’s accountant files an extension to August, but John still pays an estimate by May 15 to avoid penalties. Staying on top of the rules helps him avoid the $50 late filing penalty and the 5% to 10% late payment penalties Texas charges.
In both scenarios, the LLC owners built franchise tax into their planning and avoided nasty surprises.
Next steps
Franchise taxes may not be the most glamorous part of running a business, but understanding them is part of being a savvy entrepreneur. Franchise tax is a state-level annual tax or fee for LLCs and other businesses, separate from income tax and owed regardless of profit. The rules differ from state to state, but the idea stays the same: it’s the cost of keeping your LLC in good standing.
To stay compliant, know your obligations, mark your deadlines, and budget accordingly. Whether it’s California’s $800 annual tax, Delaware’s $300 tax, New York’s income-based fee, or Texas’s margin tax, pay attention to the states that matter for your business. If you’re still weighing your structure, compare the broader LLC tax benefits too.
FAQ
It’s an annual state tax or fee for the privilege of operating as an LLC in that state. It’s separate from income tax and is often owed even when the LLC has no profit.
No. States such as California, Delaware, Tennessee and Texas charge LLCs an annual tax, while many others charge only an annual report fee. Check your state’s tax agency for current rules.
Often, yes. Flat taxes like California’s $800 minimum and Delaware’s $300 tax are owed regardless of income. Revenue-based taxes, like Texas’s, may be $0 below the threshold.
The state can charge penalties and interest, and your LLC can lose good standing or be administratively dissolved or forfeited. You’d then need to pay what’s owed and reinstate the LLC.
You can. An LLC usually owes the annual tax in its formation state and in every state where it registers as a foreign LLC, if those states charge one.