Franchise tax is a state business tax imposed for the privilege of forming, registering, or doing business in a state. It usually applies to corporations and may also apply to LLCs, partnerships, banks, and other entities under state law.
The name is misleading. Franchise tax usually has nothing to do with owning a restaurant, retail store, or service franchise. It generally applies to the legal business entity.
State rules vary by tax year as well as by state. For example, Texas lists a $2.65 million no-tax-due threshold for 2026 and 2027, while California generally imposes an $800 minimum franchise tax on corporations.
Franchise Tax at a Glance
| Question | Answer |
|---|---|
| Who imposes it? | Usually a state government |
| Who may owe it? | Corporations, LLCs, partnerships, and other entities, depending on the state |
| What is it based on? | Income, revenue margin, net worth, capital, authorized shares, or a fixed annual amount |
| Is it the same nationwide? | No. Each state sets its own rules |
| Is it the same as income tax? | No, although some states measure franchise tax using income |
| Can an unprofitable business owe it? | Yes. Some franchise taxes are minimum or fixed taxes that apply even when a business has no profit |
There is no nationwide franchise tax rate or calculation method. A state may impose the tax on a business formed there, registered there, or doing business there.
Why Do States Charge Franchise Tax?
States use franchise tax to tax the privilege of operating under state law. A business may owe it because it:
- Was incorporated or formed in the state
- Registered to do business in the state
- Has enough business activity or presence in the state
- Uses the state's legal and commercial systems
Texas describes its franchise tax as a privilege tax imposed on taxable entities formed or organized in Texas or doing business there.
How Is Franchise Tax Calculated?
The calculation depends on the state. Common tax bases include:
- Net income: The tax uses some form of the business's taxable income.
- Revenue or taxable margin: The tax uses revenue after permitted deductions or adjustments.
- Net worth or capital stock: The tax is based on the company's capital, assets, or net worth rather than its profit.
- Authorized shares or assumed par value: The tax uses a corporation's authorized shares, issued shares, or capital structure.
- Fixed annual amount: The entity owes a set amount regardless of revenue or profit.
Texas calculates its franchise tax using taxable margin. Depending on the rules, a taxable entity may calculate its margin using total revenue multiplied by 70%, revenue minus cost of goods sold, revenue minus compensation, or revenue minus a statutory deduction.
Delaware uses a different method for corporations. A Delaware corporation calculates its franchise tax using either the authorized-shares method or the assumed-par-value-capital method. The listed minimum is $175 under the authorized-shares method or $400 under the assumed-par-value method, with a general maximum of $200,000.
Is Franchise Tax the Same as Corporate Income Tax?
No. Corporate income tax generally applies to business profits, while franchise tax applies to the privilege of operating, being organized, or maintaining a business entity in a state.
The distinction can be less clear when a state uses net income or another income-related figure to calculate franchise tax. Other states use capital, net worth, shares, revenue, or a fixed amount.
A business may owe several types of taxes and fees, including:
- Federal income tax
- State income tax
- State franchise tax
- Sales tax
- Payroll taxes
- Annual report or business registration fees
Paying one does not necessarily satisfy the others.
Can a Business Owe Franchise Tax if It Loses Money?
Yes. A business can owe franchise tax even when it has no taxable profit.
This can happen when the state imposes:
- A minimum franchise tax
- A fixed annual entity tax
- A capital or net-worth tax
- A tax based on revenue rather than profit
- A tax based on shares or legal status
California illustrates this rule. Corporations incorporated, registered, or doing business in California generally must pay an $800 minimum franchise tax. The California Franchise Tax Board states that the minimum can apply when a corporation is inactive, operates at a loss, or has a short tax year, subject to specific exceptions.
Which Businesses May Have to Pay?
The answer varies by state. Businesses that may owe franchise tax include:
- C corporations
- S corporations
- Limited liability companies
- Limited partnerships
- Limited liability partnerships
- Professional corporations
- Banks and financial institutions
- Business trusts
- Joint ventures
- Other registered legal entities
Texas includes corporations, LLCs, S corporations, partnerships, professional associations, joint ventures, trusts, and other legal entities among the businesses that may owe its franchise tax. Texas also excludes certain sole proprietorships and qualifying general partnerships.
Sole proprietors are often treated differently because a sole proprietorship may not be a separate legal entity. Whether one owes a particular business tax depends on the state and the business's activities.
Franchise Tax Examples by State
| State | Example of how the tax works |
|---|---|
| Texas | A privilege tax on taxable entities formed in Texas or doing business there. The tax is generally based on taxable margin. The 2026 and 2027 no-tax-due threshold is listed as $2.65 million, although reporting requirements can still apply. |
| Delaware | Delaware corporations must file an annual report and pay franchise tax. Domestic and foreign LLCs, LPs, and GPs registered in Delaware pay an annual entity tax and generally do not file an annual report. |
| California | Corporations incorporated, registered, or doing business in California generally pay an $800 minimum franchise tax, subject to statutory exceptions. |
The state's rules determine the tax. The business does not need to be part of a commercial franchise system.
Is an Annual Report the Same as Franchise Tax?
No. An annual report and a franchise tax are separate obligations, although a state may require them at the same time.
An annual report may update information such as:
- Business address
- Registered agent
- Officers or directors
- Ownership information
- Principal business activity
Franchise tax is the payment required under the state's tax law. Delaware, for example, requires corporations to file an annual report and pay franchise tax. Delaware LLCs, LPs, and GPs generally pay an annual tax without filing an annual report.
What Happens if a Business Does Not Pay?
Possible consequences include:
- Late-payment penalties
- Interest
- Loss of good standing
- Inability to obtain a certificate of good standing
- Administrative dissolution or forfeiture
- Problems maintaining the entity's right to do business
Delaware states that failing to file and pay required corporate franchise taxes can result in a $200 penalty plus monthly interest. Texas imposes a $50 penalty for a late franchise tax report, even when no tax is due with the report.
How Do You Find Out Whether You Owe Franchise Tax?
Check the official tax or corporate filing agency for every state where your business:
- Was formed or incorporated
- Is registered as a foreign entity
- Physically operates
- Employs workers
- Owns property
- Generates enough sales or business activity to create a filing obligation
Also confirm:
- Whether your entity type is covered
- The filing deadline
- Whether a minimum tax applies
- Whether an annual report is required
- Whether the business must file when no tax is due
- Whether formal dissolution is necessary to stop future charges
The amount you owe, the filing deadline, and the forms you must submit all depend on the state and entity type. A business can owe franchise tax even when it has no profit or is not part of a commercial franchise.