Franchise Tax: Guide For Business Owners
Despite what the name implies, franchise tax is not a tax levied on franchises specifically. Rather, this tax is imposed on businesses operating in certain states.
This often includes franchise owners, but other business owners will also need to be prepared to pay franchise taxes, depending on where they operate. Keep reading to learn what franchise taxes are and how to know if they apply to your business.
What is a franchise tax?
Franchise tax is a business tax charged by certain states for the privilege of doing business within their borders. Not every state imposes a franchise tax, and those that do set different criteria for who is required to pay it.
In many cases, whether you need to pay franchise tax will depend on your business entity. For example, sole proprietors conducting business under their own legal name may be exempt from franchise taxes, as the business typically must exist as a separate entity for it to be taxed. Nonprofits are also typically exempt from franchise taxes, though they may need to apply to be granted an exemption.
In some states, franchise taxes may be known under a different name, including privilege taxes, commerce taxes, net worth taxes and capital stock taxes.
Franchise tax vs. income tax
It’s important to note that franchise taxes are often charged in addition to income taxes — not in place of them. Depending on what state you’re in, franchise taxes may have little to do with the amount of revenue your business generates.
Though small business tax rates vary by state and business structure, income taxes are typically charged as a percentage of a corporation’s annual profit. By comparison, businesses may be required to pay franchise taxes for several reasons, including having a physical presence in a state, which means franchise taxes may be due even if your business fails to earn a profit.
Depending on where and how you operate, your business may be required to pay both income and franchise taxes. In states where businesses pay both types of taxes, they may not pay them to the same entity. In some states, there is a designated state agency or department that collects franchise taxes, and it may be separate from the entity in charge of collecting income taxes.
Who has to pay franchise taxes?
Each state has its own criteria to determine the types of businesses that are required to pay the franchise tax. In general, franchise taxes apply to any companies that do business in the state. However, different states have different definitions of what it means to do business within their borders.
Whether your business is required to pay franchise taxes will also depend on your business structure. Some states only require C corporations to pay the franchise tax, but in others, S corporations, partnerships and limited liability companies (LLCs) are also subject to this taxation. To learn more about franchise tax requirements in the states where you do business, visit your state’s official website.
Nexus is a legal term used to describe the connection between a business entity and a taxing entity, such as a specific state. Nexus is used to determine which companies need to pay certain taxes.
To determine nexus, states will typically consider both the physical and economic presence of a business. If the business has a physical location, sells goods and services or has employees in the state, a nexus is established and business owners will need to pay taxes. This means businesses may be required to pay franchise taxes in multiple states.
How is franchise tax calculated?
If your business is required to pay franchise taxes, you’re probably wondering how to plan for these costs in your business budget. Franchise tax is calculated differently in each state, and costs vary widely depending on the method that is used.
In general, states impose franchise taxes in one of the following ways:
- Flat fee. Some states charge a flat fee for the privilege of doing business. These fees may vary depending on your business type. For instance, in Delaware, small businesses that do not sell stock are required to pay a flat fee of $175, while corporations with shareholders will pay a fee based on the number of authorized shares that have been sold.
- Based on net worth. Other states base franchise taxes on the business’s net worth. For example, Georgia levies a “net worth tax” on all corporations with a net worth greater than $100,000. Businesses with a higher net worth will have to pay a higher tax — up to $5,000 for companies with a net worth exceeding $22 million.
- Based on gross receipts. Some states base franchise taxes on a percentage of the business’s gross receipts generated within that state. In Nevada, franchise taxes apply to any business that generates more than $4 million in gross revenue from Nevada-based activities.
- Combined methods. Some states use a combination of these methods to calculate franchise taxes for different types of businesses. The method used to determine your franchise tax will depend on the size and structure of your company.
Because franchise taxes vary dramatically between states, it’s important to check the guidelines in any states where your business operates. When in doubt, a tax professional can help you understand your business’s tax obligations.
Frequently asked questions
Several states impose franchise taxes, though these taxes may be known under different names. States with a franchise tax as of March 2025 include Alabama, Arkansas, California, Delaware, Georgia, Minnesota, Mississippi, Nevada, New Mexico, New York, North Carolina, Tennessee, Texas and the District of Columbia.
However, this is not a comprehensive list and tax guidelines are subject to change. For example, in 2025 Illinois proposed a bill that, if it passes, would put an end to the state’s franchise tax. With tax requirements changing regularly, it’s important to check with your state’s guidelines to determine if franchise taxes apply.
The deadline to file and pay franchise taxes depends on the state and may vary from year to year. For the most accurate information, check with your state’s department of revenue, franchise tax board or other tax authority for details on franchise tax requirements and deadlines.
Failing to pay franchise taxes can result in substantial fines, interest charges and even the loss of your business license. For these reasons, it’s important to be aware of the franchise tax obligations in every state where you do business and make sure that you make all franchise tax payments on time.
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