What Is the Franchise Tax? Here’s an Overview of What You Should Know

The franchise tax is a type of tax paid by certain organizations or enterprises that want to operate in some states. It essentially grants the business the right to charter or operate within state limits. Companies in some states could be liable for the tax even if they’ve been chartered in another state.

It should be noted that the name can be a bit misleading—it’s not a tax on franchises, and it stays separate from any federal or state income taxes that the business files each year.

Here’s a brief overview of what you should know about the franchise tax in Round Rock, TX.

About the franchise tax

Currently, the states that levy a franchise tax include Alabama, Arkansas, California, Delaware, Georgia, Illinois, Louisiana, Mississippi, New York, North Carolina, Oklahoma, Tennessee and Texas. States that previously had franchise taxes that have since been discontinued include Kansas, Missouri, Pennsylvania and West Virginia.

Franchise taxes are charged to corporations, partnerships and LLCs that operate within state boundaries, though some entities are exempt from these taxes, including nonprofits, fraternal organizations and some types of LLCs. In addition, most sole proprietorships will be able to avoid paying franchise taxes and various forms of state business income tax, because these businesses do not get formally registered in the state in which they operate.

Companies that operate in multiple states will be charged the franchise tax in the state in which they formally registered their business, so some companies might strategically charter their company in a state that does not charge this tax, even if they don’t operate there.

While franchise taxes are not an income tax, they are typically paid each year at the same time businesses pay their other taxes. The amount a business pays for the franchise tax will vary depending on each state’s tax rules, as each state calculates the tax differently. Some will calculate the amount owed based on the entity’s net worth or assets, while other states will use the value of the company’s stock to determine the amount of franchise tax owed. In some cases, the franchise tax might be a flat fee regardless of these valuations. It’s important to understand the rules for the specific state in which you will owe the tax.

If your business is formally registered in multiple states, that means you may need to pay franchise taxes in all of those states. You should be sure to work that into your tax calculations for each year and consider that as part of your budgeting and financial planning.

If you are interested in learning more about the franchise tax, how it could potentially affect your business and the best ways to plan around it, it is in your best interest to work with a CPA and carefully assess your financial situation. For more information and to get answers to any questions you have about the franchise tax, we encourage you to contact Perrin Anderson Rastogi Tax Services LLC to speak with a trusted CPA in Round Rock, TX.