Franchise tax is a state-imposed fee that businesses must pay for the privilege of being registered and operating in that state. It’s not a tax on income but rather on the company’s legal existence, and applies to many LLCs and corporations regardless of profitability.
What is a Franchise Tax?
Franchise tax is a recurring fee charged by certain U.S. states to businesses registered or authorized to operate there. Unlike income tax, it’s not based on profits—it’s essentially the cost of maintaining your company’s legal status in that state. The amount can be a flat rate or calculated from factors like net worth, capital stock, or number of authorized shares.
For example, California charges most LLCs and corporations a minimum of $800 annually, with extra fees for higher income levels. Texas bases its franchise tax on “taxable margin,” calculated from revenue using specific formulas. New York corporations pay the greater of tax on business income, tax on capital, or a fixed dollar minimum. Illinois imposes an initial franchise tax at incorporation and an annual tax based on paid-in capital in the state. Delaware charges LLCs a flat $300 per year, while corporations use either the Authorized Shares Method or the Assumed Par Value Capital Method, which can produce very different results depending on the structure.
Non-U.S. founders should pay special attention—failure to pay franchise tax can lead to penalties, interest, or even administrative dissolution (loss of good standing), even if the company has no income or is not actively doing business. Deadlines vary by state; for example, in Delaware, franchise tax is due by March 1 for LLCs and June 1 for corporations. Missing these deadlines can make it harder to maintain compliance, open bank accounts, or complete future filings.
Even inactive companies in some states must pay franchise tax until they are formally dissolved, so understanding the rules in your formation state is essential to avoiding unnecessary costs.
