What are franchise taxes?
Franchise taxes are often referred to as a “privilege tax” and are basically a fee that a business pays to a state for the privilege of incorporating or conducting business in the state. Unlike income tax, franchise taxes are not usually based on the profits of the business. Therefore, a business may be required to pay franchise taxes even if the business had no net income or experienced a loss during the tax year.
Franchise taxes vary significantly from state to state. Many states do not have a franchise tax. In states that do have a franchise tax, it may be assessed as a flat fee, a fee that is based on the company's gross revenue, a fee that is based on the net worth of the company, or a fee that is based on some other calculation. Additionally, some states call their franchise taxes something else, such as in Alabama, where franchise taxes are called a “business privilege tax.”
Franchise taxes are sometimes confused with income taxes, but they are indeed different. Many states assess either a franchise tax or an income tax on businesses. But some states, such as Louisiana, may impose both a franchise tax and an income tax on the same business.
When are franchise taxes due?
The due date for franchise taxes depends on which states you are paying franchise taxes in and what type of business you operate. If you have not formed your business yet, it is recommended that you look into the Incorporation process as soon as possible.
For example, Delaware corporate franchise taxes are due on March 1st each year. Franchise taxes for Delaware limited liability companies are due on June 1st of each year. Texas franchise taxes are due on May 15th each year. Some states, such as Missouri, base their due date for franchise taxes on the tax year of the business (the 15th day of the fourth month from the beginning of the business period in the case of Missouri).
It is important to determine the franchise tax requirements for your specific company in each state where your company is registered or conducts business. For assistance with determining if and when your company is required to pay franchise taxes, you may want to talk to a Tax Pro.
Where do I pay franchise taxes?
If your business is required to pay franchise taxes, then you are expected to pay it to the appropriate state agency where your business is registered or conducts business. If your business is registered or conducts business in multiple states, then you may be required to pay separate franchise taxes in each state.
How do franchise taxes work in some key states?
The laws around franchise taxes vary greatly by state. Some of the more complicated states include Delaware, California, New York, Georgia, North Carolina, and Illinois. See below for information regarding franchise taxes in these specific states.
Delaware corporations must pay franchise taxes by March 1st of each year. Delaware limited liability companies and limited partnerships must pay franchise taxes by June 1st of each year. Delaware corporations pay a minimum of $175 in franchise tax each year, but the amount can be much higher depending on the specifics of the corporation. Delaware limited liability companies and limited partnerships pay a flat $300 franchise tax each year.
California businesses pay a $800 annual franchise tax. For California corporations, the minimum annual franchise tax is $800 but may be higher depending on the corporation's net income. The California franchise tax due date varies depending on the entity type and when the business's tax year ends.
New York has one of the more complicated franchise tax policies. Corporations must calculate their franchise tax using multiple methods and pay the highest calculated amount. New York franchise tax only applies to corporations, but New York has a "filing fee" tax that applies to limited liability companies and partnerships. The filing fee tax is similar to a franchise tax.
Georgia has a net worth tax, which is essentially a franchise tax. Depending on the net worth of the business, the Georgia net worth tax can be as much as $5,000 annually. The due date for paying the net worth tax varies based on the business type and the tax year of the business. Certain limited liability companies are not subject to the net worth tax in Georgia.
North Carolina has a franchise tax for corporations and the minimum annual franchise tax is $200. The due date for most businesses to pay their franchise taxes is April 15th unless the business operates on a fiscal tax year.
Illinois enacted legislation in 2019 to repeal its franchise tax by January 1, 2024. However, new legislation in 2021 revived the Illinois franchise tax and repealed its planned elimination. There are multiple ways of calculating a business's Illinois franchise tax and the amount owed may vary depending on the type of calculation used.
Are franchise taxes avoidable?
If your business is registered or operates in a state that requires a franchise tax to be paid, then you are required to pay it provided you meet the specific requirements in that state. Keep in mind that some states with a franchise tax do not impose it on all businesses. For example, Texas has a franchise tax, but no franchise tax is due if the business has less than $2,470,000 of total revenue.
What happens if I don't pay my franchise taxes?
If your business fails to pay its franchise taxes timely to a state that it operates in, the state may assess penalties and interest until the franchise taxes are paid. Your business is likely to receive notices from the state until the franchise tax, along with any penalties and interest, have been paid. You may also face a tax lien if the franchise tax remains unpaid for too long.
Failing to pay your business franchise taxes may also result in your business losing its legal standing in the state where the payments are due. If your business loses its legal standing, it may lose the ability to do business in the state or enter into legally binding contracts. The owners of the business may also lose their limited liability protection, meaning that the owners could be personally liable for debts or lawsuits against the business.
Understanding how much franchise tax to pay and when to pay it can be confusing. Franchise taxes often vary significantly based on the type of business, the tax structure, and the net worth of the business. If you have questions about tax laws and the impact to your taxes, reach out to a Rocket Legal Pro for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.
