Starting a business comes with many surprises – and taxes are often high on that list. One tax that catches many new LLC owners off guard is the franchise tax. Despite its confusing name, the franchise tax isn’t about fast-food franchises at all. It’s a state-level tax (sometimes called a privilege tax) that LLCs and other companies must pay for the “privilege” of doing business in a state.
Franchise tax is essentially an annual fee or tax that certain states charge business entities like LLCs (as well as corporations and partnerships) for the right to exist or do business in that state. In other words, it’s the cost of having your LLC “chartered” or registered in the state. Importantly, a franchise tax is not related to owning a franchise business – the term “franchise” here means the privilege to operate within the state’s jurisdiction. Some entrepreneurs actually call it an “LLC annual tax” or “annual LLC fee,” which might make more sense because it’s paid every year you’re in business.
Unlike LLC taxes based on your profits, the franchise tax is charged regardless of whether your LLC makes money. Even if your LLC had a break-even year or operated at a loss, you’re still on the hook for the franchise tax in states that impose it. It’s essentially a cost of maintaining your business’s legal status each year. Failing to pay it can have serious consequences – states can dissolve your LLC or revoke its good standing if you don’t pay up. In short, franchise tax is a must-know for LLC owners because it can’t be ignored without risking your business’s legal status.
Not all states have a franchise tax for LLCs. Each state sets its own rules: some charge a flat annual LLC tax, others calculate the tax based on factors like your company’s revenue, assets, or capital, and a few don’t charge any franchise tax at all. For example, states like Kansas, Missouri, Pennsylvania, and West Virginia have even eliminated their franchise taxes in recent years. But many states – including big ones like California, Delaware, New York, and Texas – do impose some form of franchise or annual business tax on LLCs. If your LLC is registered or doing business in one of these states, you’ll likely owe a franchise tax there.
One important thing to note: if your LLC does business in multiple states, you could be subject to franchise tax in each of those states. Generally, you pay franchise tax in the state where your LLC is formed and any state where it’s registered as a “foreign LLC” (i.e. operating there). So, expanding your business into new states or choosing to form your LLC out-of-state (like Delaware) means you should budget for multiple state fees.
It’s easy to confuse franchise taxes with income taxes because both are government fees related to your business. However, franchise tax is very different from income tax in how it’s calculated and why it’s charged. Here are the key differences:
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, it generally doesn’t owe business income tax (though the owners might have no income to report). In contrast, franchise tax is not based on profit. It’s often a flat fee 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.
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 even call it a “privilege tax” or “registration fee” instead of franchise tax. It’s basically the state’s way of saying “if you want the benefits of an LLC (like limited liability) here, there’s an annual charge for that.”
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 only levied by states (or sometimes cities) – there’s no federal franchise tax. It’s an obligation to the state where your LLC is registered/doing business, and you pay it to that state’s tax authority or secretary of state.
You typically calculate and pay income taxes annually when you file returns (e.g., by April 15 for federal taxes, with quarterly estimates for some). Franchise taxes are usually paid annually as well, often due at a set time each year (which can coincide with tax season or an anniversary date). For instance, many franchise taxes are due by a certain date (we’ll see examples like March 15, April 15, May 15 for various states). Unlike income tax, franchise tax doesn’t have “brackets” or standard rates – it varies widely by state law.
Perhaps the biggest practical difference: If your LLC has no income or loss, you owe $0 in income tax (and might not even need to file a separate business tax return in the case of a single-member LLC). 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 full $800 franchise tax each year and a Texas LLC with no profits might still need to file a report (even if no actual tax payment is due, as we’ll discuss).
In short, income tax depends on your profitability, while franchise tax is a cost of maintaining your LLC’s legal status. Both are important parts of small business tax compliance, but they operate on different tracks. When planning your finances, think of franchise tax as a fixed or base cost (tied to state requirements), whereas income tax will fluctuate based on how your business performs.
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. Generally, the following need to pay franchise taxes where applicable:
You generally do not pay franchise tax if you haven’t actually formed an official business entity. For example, a sole proprietorship or a general partnership (that is not registered as an LLC or LLP) usually doesn’t have to pay franchise tax because it’s not a formally registered entity. If you’re without an LLC, you’re free of franchise tax – but of course, you also lack the legal protections that an LLC provides. Essentially, operating without an LLC avoids the franchise tax but at the cost of having no liability shield.
It’s also worth noting that some types of organizations are exempt from franchise tax in various states – typically nonprofits, certain fraternal organizations, or very specific types of passive entities. 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 personally owe any money, you may still have to file franchise tax forms or reports. Some states set a minimum 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 declaring that you owe nothing. (We’ll see this in Texas’s example.) It’s crucial to know the rules, because not filing required paperwork can lead to penalties even if no tax was due.
Several U.S. states impose a franchise tax or similar fees on Limited Liability Companies (LLCs) for the privilege of operating within their jurisdiction. The specific terms, calculations, and amounts can vary significantly by state. Here’s a list of states that require LLCs to pay a franchise tax or a comparable fee:
States That Require Franchise Tax or Similar Payments for LLCs
Franchise tax rules can vary dramatically from state to state. Let’s break down how it works in a few notable states – New York, California, Delaware, and Texas – to give you a clearer picture. These examples will show the range of what to expect.
New York doesn’t call its LLC charge a “franchise tax” by name, but it does require most LLCs to pay an annual LLC filing fee to the Department of Taxation and Finance. If your New York LLC (or an LLC from elsewhere doing business in NY) has any income from New York sources, you’ll need to file Form IT-204-LL each year and pay this feet The fee is based on your LLC’s gross income in New York for the previous year.
For small businesses, the good news is that the New York LLC fee starts low: $25 if your New York-sourced gross income is under $100,000. It scales upward in tiers as your income grows. For example, an LLC with NY gross income between $100k and $250k pays $50, and higher income bands pay a few hundred dollars, capping at $4,500 for very high gross income (over $25 million). Most small LLCs will fall into the lower end of this range. Notably, single-member LLCs that are disregarded for federal tax and have NY income also pay a flat $25 in New York..
Also, keep in mind New York has a separate biennial statement requirement (a $9 fee every two years to the Department of State) not a tax, but another compliance to remember. Always distinguish the tax department’s filing fee (which we’re discussing here) from the corporate annual/biennial report fees that many states also charge.
California is infamous among entrepreneurs for its franchise tax. Every LLC doing business in California (or organized there) must pay a minimum franchise tax of $800 per year. This is often simply referred to as the “annual $800 LLC tax”. Crucially, this $800 is due even if your LLC didn’t make a dime of profit – even if it’s completely inactive! California charges this fee to all LLCs, LPs, and corporations just for the right to exist in the state. (Sole proprietorships and general partnerships escape this fee since they are not registered entities)
For many cash-strapped startups, $800 a year can feel steep. California did have a temporary rule waiving the first-year tax for new LLCs formed in 2021-2023, but that expired as of 2024. Now, any new California LLC is back to paying $800 in its first year (due within a few months of formation) and each year after. In fact, the first payment is due by the 15th day of the 4th month after you form the LLC. So if you form a California LLC in July, you’re paying $800 by November of that year. After the first year, the $800 is due every year by April 15 (for calendar-year entities)l
Delaware is a popular state for forming businesses because of its business-friendly laws. The good news for Delaware LLC owners is that the franchise tax for LLCs is a flat, predictable fee. All domestic Delaware LLCs (and LPs and GPs) pay an annual tax of $300 to the state. Unlike some states, Delaware’s LLC tax is not based on income or size – every LLC pays the same $300. This is sometimes referred to as the “alternative entity tax” in Delaware (to distinguish it from the corporate franchise tax). Even a one-person LLC with no activity owes $300 each year in Delaware.
One reason many startups form in Delaware is that $300 is relatively modest compared to states like California’s $800. However, be careful: if you don’t actually live or do business in Delaware, you’ll likely have to register your LLC in your home state too – which means paying that state’s franchise/annual fees in addition to Delaware’s $300. For example, a small business owner in New Jersey might form a Delaware LLC for the legal perks, but if the business is operated in New Jersey, they’ll register as a foreign LLC in NJ and pay New Jersey’s fees plus Delaware’s $300. So, consider the combined LLC costs in your planning. Example: You have a Delaware LLC that owns a simple online business. You’re looking at $300 per year to Delaware, due by June 1. If you pay on time, that’s all – no other hoops. If you miss the deadline, by July you’d owe $300 + $200 penalty + interestc, which can add up quickly.
Texas’s franchise tax (often called the Texas “margin tax”) works a bit differently. **Texas charges franchise tax based on a business’s revenues/margins, not a flat fee. However, Texas provides a very large “No Tax Due” threshold, which means **most small LLCs in Texas owe $0 in franchise tax – but they still may have to file certain forms. As of reports due in 2024, the no-tax-due threshold is $2.47 million in annual revenue. In plain language, if your Texas LLC’s total revenue is $2.47 million or less, you do not pay any franchise tax to Texas, which is fantastic for small businesses.
Historically, even if you owed $0, you had to file a No Tax Due Report each year. Good news: Starting in 2024, Texas no longer requires LLCs under the threshold to file that no-tax-due report. They realized it was unnecessary paperwork for so many businesses. But – such LLCs do still need to submit a simple Public Information Report every year, which updates the state on your contact and ownership info. So there’s still an annual filing, just not a tax calculation if you’re under the threshold.
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. Here are some actionable tips to help you manage your LLC’s franchise tax smoothly:
First, research whether your state has a franchise or annual tax for LLCs, and what it’s based on. As we saw, it ranges from flat fees (DE, CA) to revenue-based (TX) to income-based fees (NY). Check your state’s official business or tax agency website for “LLC annual tax” or “franchise tax.” If you operate in multiple states or are registered in more than one, be sure to repeat this for each state. Make a list of each state’s requirements so nothing slips through the cracks.
Deadlines vary: e.g. March 15 (NY LLC fee), April 15 (CA LLC tax), May 15 (TX franchise report), June 1 (DE LLC tax), etc. Missing a deadline can mean penalties, late fees, or worse. Use a digital calendar, project management tool, or old-fashioned planner to mark these key dates well in advance. Set reminders a month before, a week before, and on the due date. This way, you’ll have time to gather funds and file on time.
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. By planning for it, you won’t be caught off guard when the bill comes. It can be helpful to set aside a small amount each month toward these annual fees (e.g., set aside ~$67 a month for the $800 California tax) so it’s not a large hit at once.
Paying the franchise tax is often tied to your business’s good standing status in the state. Falling behind can lead to your LLC being not in good standing or even administratively dissolved. This can have snowball effects: you might not be able to secure financing, enter contracts, or file lawsuits until it’s resolved. It’s much easier to just pay the small tax or file the required report than to fix a reinstatement later. As one resource put it, if you don’t pay, the state can dissolve your LLC, a headache you don’t need.
Consider using compliance services (many registered agent services offer compliance reminders), or at least set automatic payments if your state allows. For instance, Delaware lets you pay online – you could do it as soon as the window opens. Some business owners also delegate this to their accountant or bookkeeper to handle annually. Find a system that works for you so it doesn’t rely purely on memory.
When planning a new LLC, timing can save money. For example, in California, if you form an LLC late in the year, you’ll pay $800 for that partial year and another $800 in early spring – essentially two payments in a short time. In that case, waiting until after January 1 to legally form the business could avoid the extra immediate payment (while you might operate as a sole prop in the final weeks of the year, then convert). Always balance this against business needs, but it’s a tactical consideration. Additionally, if an LLC is no longer needed, properly dissolving it with the state will stop future franchise tax obligations from accruing.
In some scenarios, changing your tax election might affect franchise taxes. For instance, New York exempts LLCs that elect to be taxed as corporations from the LLC filing fee (because they then fall under corporate tax rules). This doesn’t mean you should rush to be taxed as a corporation (that has its own pros/cons), but it’s good to know the interactions. Another example: Texas exempts certain passive entities or new veteran-owned businesses from franchise tax. Make sure you’re not missing an exemption your business qualifies for.
After you pay your franchise tax or filing fee, save proof of payment and any filed report. If the state ever makes an error (it happens), you want to have your receipt or cancelled check. Many states provide a certificate of good standing which you can request or download once you’re paid up – it’s a quick way to reassure yourself everything’s compliant.
Franchise taxes can be nuanced, especially if your business operates in multiple states (creating a web of taxes) or if you’re near a threshold. A quick chat with a CPA or business attorney can clarify your specific obligations. It’s part of overall business tax compliance and planning. Professionals can also help you strategize – for example, if you’re expanding, they might advise which state to register in first or how to minimize taxes legally.
To put it all together, let’s look at two quick contrasting scenarios:
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/fees for the privilege of doing business in those two states. If she only formed in California, she’d pay $800; only in Delaware (but still operating in CA without registering) would be illegal – so she correctly complies with both. Maria decides the Delaware advantages are worth the extra $300, but she makes sure her pricing and budgeting cover these costs. She uses a calendar alert for May (to prep for Delaware by June 1) and another for April (California deadline).
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 high no-tax-due threshold, though he dutifully files his Public Information Report each May. By year 3, his app takes off and revenues hit $5 million. Now he must calculate and pay Texas franchise tax. Using the simplified margin calculation, let’s say he owes about $20,000 in franchise tax. That’s a new expense he plans for. It’s not small, but considering it’s based on a multi-million revenue, it’s manageable. John’s accountant helps file an extension to August, giving them time to file the report, but John still pays an estimated amount by May 15 to avoid penaltiesr. By staying on top of the rules, he avoids the $50 late fees and 5-10% penalties Texas would charge for missing deadlines.
In both scenarios, the LLC owners incorporated the franchise tax into their planning and avoided nasty surprises. As an entrepreneur, that’s what you want to emulate.
Franchise taxes may not be the most glamorous part of running a business, but understanding them is part of being a savvy entrepreneur. In summary, franchise tax is a state-level annual tax or fee for LLCs and other businesses, distinct from income tax and owed regardless of profit. By breaking down the concept and looking at examples from New York, California, Delaware, and Texas, we’ve seen how the rules can differ but the fundamental idea remains: it’s the cost of keeping your LLC in good standing with the state. To stay compliant, know your obligations, mark your deadlines, and budget accordingly. Whether it’s the $800 California LLC tax or the $300 Delaware fee, New York’s income-based fee, or Texas’s margin tax, there’s no one-size-fits-all – so pay attention to the states that matter for your business. With a bit of organization and the tips outlined above, you can handle franchise taxes as just another routine task in your annual business calendar.
Remember, staying on top of taxes (franchise tax, income tax, sales tax, and others) is part of good business tax compliance and keeps your small business running smoothly. When in doubt, consult professionals or resources provided by your state’s small business portals for guidance. By demystifying things like the LLC franchise tax, you empower yourself to focus more on growing your business and less on worrying about unexpected fees. Happy entrepreneuring!
This portion of our website is for informational or educational purposes only. Tailor Brands is not a law firm, and the information on this website does not constitute legal advice. All statements, opinions, recommendations, and conclusions are solely the expression of the author and provided on an as-is basis. Accordingly, Tailor Brands is not responsible for the information and/or its accuracy or completeness. It also does not indicate any affiliation between Tailor Brands and any other brands, services or logos on this page.
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