A franchise tax is a state-level fee that certain business entities pay for the legal privilege of being organized or doing business in that state. It applies whether or not the company earned a profit, and it is separate from any income tax the state may also charge. Roughly a dozen states impose what they formally call a franchise tax, and the name, structure, and rates vary sharply from one state to the next. Bills range from a flat $175 annual charge to hundreds of thousands of dollars for large corporations.
Franchise Tax vs. Income Tax
A franchise tax is a privilege tax. It charges a business for the right to exist as a legal entity or operate within the state’s borders. A corporate income tax, by contrast, is levied on net earnings. The practical difference: a business that loses money all year still owes franchise tax, because the tax isn’t tied to profit.
Some states use a franchise tax as their primary business-level tax instead of a corporate income tax. Texas has no traditional corporate income tax but imposes a franchise tax (often called the margin tax) on nearly all business entities. Ohio and Washington take a similar approach with gross receipts taxes. Other states, including Georgia and Louisiana, impose both a franchise tax and a corporate income tax, creating two separate obligations for the same entity.
Which Businesses Owe It
The franchise tax generally targets entities that enjoy limited liability protection from the state. That includes C-corporations, S-corporations, and limited liability companies. Some states also sweep in limited partnerships and professional associations if they’re registered with the state.
C-corporations are the most commonly taxed entity type, whether they were formed in the taxing state or registered there as a foreign entity (meaning incorporated elsewhere but doing business locally). S-corporations often get pass-through treatment for federal income tax, but most states with a franchise tax still require S-corps to pay it. The state views the corporate liability shield itself as the taxable privilege, regardless of how the entity files federally.
LLCs face franchise tax obligations in several states. California requires every LLC doing business or organized in the state to pay an $800 annual tax. Delaware charges LLCs a flat $300 annual tax. Other states fold LLCs into the same franchise tax framework as corporations.
The obligation is triggered by nexus, the minimum connection between a business and a state that gives the state the power to tax it. For a company formed in the state, nexus exists automatically. For an out-of-state company, nexus can be established by having employees, owning property, or generating significant revenue in the state. Several states now apply economic nexus thresholds to franchise taxes, meaning a company with no physical presence but substantial sales in the state may still owe.
Who Is Exempt
Sole proprietorships are generally not subject to franchise tax. Because a sole proprietor is not a separate legal entity from the owner, there is no corporate privilege to tax. The exception is a single-member LLC that hasn’t elected to be disregarded for state tax purposes.
Nonprofit organizations recognized as tax-exempt under Section 501(c)(3) of the Internal Revenue Code are typically exempt from state franchise taxes as well. Many states grant this exemption automatically once the organization receives its federal determination letter, though some require a separate state application.
Small businesses sometimes fall below a state’s franchise tax threshold. Texas, for instance, sets a no-tax-due threshold at $2,650,000 in total revenue for the 2026 report year. Any entity under that amount owes no franchise tax, though it may still need to file a report. California exempts newly formed corporations from the $800 minimum franchise tax during their first taxable year. Thresholds and exemptions vary significantly between states.
How States Calculate the Tax
Different states use different bases for the calculation, and within a single state a company may need to compute the tax multiple ways and pay whichever amount is highest.
Net Worth or Capital Stock
Several states calculate the franchise tax based on the entity’s net worth, essentially total assets minus total liabilities. This taxes the equity value of the business regardless of whether it generated any revenue during the year. The rate is typically applied per dollar of net worth attributable to the state, with graduated brackets in some states.
Gross Receipts and Margin
Some states tax total revenue rather than net worth. Texas uses a version of this called the margin tax. A business starts with total revenue and subtracts the greater benefit of either cost of goods sold or total compensation to arrive at a taxable margin. The rate is 0.75% for most businesses, or 0.375% for retailers and wholesalers. The entity can also elect to use 70% of total revenue as the margin, or total revenue minus $1,000,000, whichever method produces the lowest result.
Authorized Shares
Delaware, where more than half of publicly traded U.S. companies are incorporated, uses a method for corporations based on the number of authorized shares in the company’s charter. A corporation with 5,000 or fewer authorized shares pays a $175 minimum. The tax increases for each additional block of 10,000 shares, up to a maximum of $200,000 per year. Delaware also offers an alternative assumed par value capital method, which calculates the tax at $400 per million dollars of assumed par value capital, with a $400 minimum. Companies incorporated in Delaware should calculate both ways and pay the lower amount, since the authorized shares method can produce surprisingly high bills for companies that authorized millions of shares at formation without thinking about franchise tax consequences.
Minimum Tax
Nearly every state with a franchise tax sets a floor: a minimum amount due regardless of what the formula produces. California’s $800 minimum applies to most corporations and LLCs doing business in the state. Delaware’s minimum for corporations is $175 under the authorized shares method or $400 under the assumed par value method. These minimums are owed even if the business had zero revenue, and they function as a baseline cost of maintaining the legal entity. If the calculated tax exceeds the minimum, the company pays the higher amount instead.
Operating in Multiple States
A business operating in multiple states doesn’t owe franchise tax on 100% of its tax base to every state. It uses an apportionment formula to determine what share of its activity is attributable to each taxing state. States historically used a three-factor formula weighting in-state property, payroll, and sales, but roughly 34 states now primarily use a single-sales-factor formula, where only the in-state share of sales matters. Most of those states determine where a sale occurred based on where the customer is located, an approach called market-based sourcing.
Filing Deadlines
Franchise tax deadlines are generally tied to the entity’s income tax filing schedule. For calendar-year C-corporations, that typically means the 15th day of the fourth month after the tax year ends, aligning with the April 15 federal deadline. S-corporations and partnerships often face an earlier March 15 deadline federally, and many states follow the same calendar.
Most states offer an automatic six-month extension to file the franchise tax report, but the extension only covers paperwork. The payment itself is still due by the original deadline, and interest and penalties start accruing immediately on any unpaid balance. Some states set entirely different dates. Delaware corporate franchise tax reports are due March 1, while Delaware LLC taxes are due June 1.
The reporting mechanism varies too. Some states fold the franchise tax into the corporate income tax return. Others require a separate form.
What Happens If You Don’t Pay
Ignoring a franchise tax bill creates problems well beyond late fees. Most states assess penalties and charge interest on the unpaid balance, often at rates around 1.5% per month. The bigger risk is administrative.
A state can suspend or forfeit the entity’s legal standing for non-payment. Forfeiture means the business loses the right to bring lawsuits in the state’s courts, cannot enforce contracts, and may be unable to amend its formation documents. In some states, officers and directors can lose their personal liability protection for obligations incurred while the entity is suspended, which defeats the purpose of forming a corporation or LLC in the first place.
Reinstatement is possible but costly and slow. The business typically must pay all back taxes, penalties, and interest, plus a reinstatement fee that can range from $50 to $750 or more depending on the state and how long the entity has been out of compliance. Prolonged non-payment can eventually lead to the state dissolving the entity’s charter entirely, forcing the business to re-form from scratch. Good standing with the secretary of state depends on keeping franchise tax current, and that status affects everything from closing bank loans to selling the business.
Recent Changes
The rules keep moving. Oklahoma eliminated its franchise tax entirely after the 2023 tax year. Tennessee repealed the property-based measure of its franchise tax in 2024, narrowing the tax to net worth only and reducing the burden on asset-heavy businesses. Several other states have reduced rates or raised exemption thresholds in recent years. A business that last checked its franchise tax obligations a few years ago may find the rules in a given state have shifted meaningfully.