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Franchise Tax: What Is It And Who Pays it?

If you run a business, you can expect to pay a variety of different taxes. The form of business you operate, however, will determine which taxes you’ll owe and how to pay them. Most employers will need to pay income taxes (state and federal) and employment taxes (Social Security, Medicare, and FUTA). You may also be required to pay self-employment tax, sales tax, excise tax, or franchise tax – just to name a few.

Although most of these tax names are fairly self-explanatory, franchise tax is a little tricky. It actually has nothing to do with owning a franchise. Keep reading to learn more about what a franchise tax is and who must pay it.

What is Franchise Tax?

Franchise tax, also known as a privilege tax, is levied at the state level. It is imposed on certain companies and partnerships in exchange for the “privilege” of doing business in that state. You may also owe a franchise tax if you own business property in a state.

Who Has to Pay Franchise Tax?

Generally, if you’re required to register your business with a state, you’ll need to pay a franchise tax. Some businesses, such as nonprofits and self-proprietorships, are often exempt from paying this tax. This varies from state to state, however, so check the rules where your business is incorporated or you conduct business.

States That Impose The Tax

The majority of states do not impose a franchise tax. Those that do, however, have different rules and rates. At this time, the following states have some form of privilege tax:

Alabama – The business privilege tax rate for corporations and LLCs ranges from $0.25 to $1.75 for each $1,000 of net worth. The minimum amount charged is $100. The maximum amount assessed is $15,000. Financial institutions and groups, as well as insurance companies, have a maximum business privilege tax of $3 million.

Arkansas – All corporations, LLCs, banks, and insurance Companies registered in Arkansas must pay an annual franchise tax between $150 and $400. Corporations and banks with stock pay 0.3% of the outstanding capital stock or $150 min., whichever is greater. The same is true for mortgage loan corporations.

California – The California franchise tax is based on a business’s tax classification. The minimum amount levied is $800.

  • C corporations – 8.84% of net income
  • S corporations – 1.5% of net income
  • Partnerships – $800

Partnerships formed between January 1, 2021, and December 31, 2023, however, are exempt from paying the tax in their first taxable year. General partnerships, tax-exempt businesses, and sole proprietors are exempt from paying a franchise tax.

Delaware – All corporations incorporated in Delaware must pay a franchise tax. The minimum tax is $175.00 for corporations using the Authorized Shares method and a minimum tax of $400.00 for corporations using the Assumed Par Value Capital Method.

Georgia – Georgia assesses a net worth tax for corporations doing business in the state. The fee ranges between $125 and $5,000. Corporations with a net worth of less than $100,000 are not required to pay the tax.

Illinois – A franchise tax rate of 0.1% is levied on any corporation doing business in Illinois, regardless of where it is located. The minimum franchise tax fee is $25.  The maximum is $1 million. This tax is being phased out and will be eliminated by 2024.

Louisiana – For tax periods before January 1, 2023, the franchise tax rate is $1.50 for each $1,000 or major fraction thereof up to $300,000 of capital employed in Louisiana and $3 for each $1,000 or major fraction thereof over $300,000. After January 1, 2023, the tax is eliminated for capital below $300,000. For capital above $300,000, the rate is reduced to 2.75%. The initial corporation franchise tax is $110. This applies to any corporation or any entity taxed as a corporation for federal income tax purposes that is incorporated, owns property, or does business in Louisiana.

Mississippi – Mississippi’s franchise tax applies to most corporations doing business in the state. The rate is $2.50 per $1,000 of the value of the capital used, invested, or employed in the state. The minimum franchise tax due is $25.

New York – If your business is incorporated, does business, or participates in certain activities in New York, you may have to pay a franchise tax. It’s a bit more complicated than other states since you’ll need to calculate three different amounts:

  • Your tax on business income
  • Your tax on business capital
  • Your fixed dollar minimum tax

Whichever of these amounts is greater is the amount you’ll need to pay.

North Carolina – The North Carolina franchise tax rate varies based on your business entity. For C corporations, the tax rate is $1.50 per $1,000, with a minimum franchise tax of $200. S corporations are assessed $200 for the first $1 million and $1.50 per $1,000 for any amount exceeding $1 million. The minimum amount is also $200. Holding companies are taxed the same as general corporations but the maximum amount due cannot exceed $150,000.

Oklahoma – Oklahoma’s franchise tax is assessed at the rate of $1.25 per $1,000.00 or a fraction thereof on the amount of capital allocated or employed in Oklahoma. The maximum annual franchise tax is $20,000. Companies that owe less than $250 in franchise tax are exempt from paying it.

Tennessee –  Corporations, limited partnerships, limited liability companies, or business trusts chartered, qualified, or registered in Tennessee, or doing business in the state, are assessed at 0.25% of the net worth of the corporation or tangible property in Tennessee, whichever is greater. The minimum franchise tax is $100.

Texas – Taxable entities incorporated in Texas or doing business in the state must pay a franchise tax. Tax rates vary by year, computation method, and entity type. For the 2022 tax year, the no-tax-due threshold is $1,230,000.

Filing requirements and payment due dates also vary by state. For additional information, visit your state’s Department of Revenue website.

Need Help?

If you need assistance filing your business taxes, contact Tax Defense Network. We offer affordable tax preparation, audit assistance, payroll relief, and other tax services. Call 855-476-6920 today for a free consultation and quote.