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The ABCs of franchise tax

A franchise tax is a government tax/levy charged annually by most states to certain business organizations for the right to legally do business within that state. When a business organization refuses to pay franchise taxes, it can result in that company becoming prohibited from conducting business in that state.

The franchise tax is not limited to franchise businesses, it is also charged to corporations, partnerships, and limited liability corporations (LLCs) that do business within the state. However, some business entities for specific reasons are exempted from franchise taxes like the sole proprietorship, non-profit organizations, unincorporated political committees, etcetera.

Criteria for determining Franchise Tax for various Business entities

Some considerations assessed by various states to determine the organizations to be taxed and the amount of franchise tax to be paid by those organizations include; the income of the organization, the total value of the capital stock, the gross assets, net worth, and the value of tangible properties owned by the enterprise.

However, for some states, the franchise tax imposed on business entities are usually a flat fee and not based entirely on the size of the corporation’s net worth or total Income. This, therefore, shows that the amount of franchise tax to be paid differs across various states and it depends on the tax rule within each state and the type of business entity that is involved.

Types of Franchise tax

The type of franchise tax imposed on certain businesses differs based on the State of business operation, the size of the corporation, the net worth of your business organization, and other special varying factors. Based on these, your franchise tax can be;

  1. A flat fee paid annually.
  2. Calculated based on business net worth.
  3. Calculated based on the company’s margin
  4. Calculated based on the company’s gross receipts.

States that currently have franchise tax in the US

There are fifteen states in the US where business organizations are required to pay a franchise tax. They include; Alabama, Arkansas, Delaware, Georgia, Illinois, Louisiana, New York, Missouri, Mississippi, North Carolina, Oklahoma, Pennsylvania, Tennessee, Texas, and West Virginia

Difference between Franchise tax and Income tax

Franchise taxes differs entirely from income taxes and it is required in addition to income taxes in most states.

  1. A franchise tax is not based on the corporation’s profit and must be paid whether the corporation makes a profit during the fiscal year or not. On the other hand, income tax is calculated based on the corporation’s net profit for the year. Therefore, if no Profit is made, no income tax will be required.
  2. Franchise tax is imposed on corporations for the right to do business in a particular state while income tax applies to all corporation that makes income from within the state, including corporations that might not physically do business in that state

Franchise tax and Business growth

A franchise tax is paid to grant business enterprises a right to operate in the state. This means it is entirely compulsory as long as the business wants to continue its activities within that state. In most states, the payment of franchise tax is required alongside income taxes which leads to high tax rates that may eventually discourage business growth and establishment. Sometimes, even existing businesses can be forced to close their operations within the state if they cannot cope with the increased tax rates in that state.

Do you have trouble getting up to speed and being compliant with your income and franchise taxes? Why not contact us today. We are a tax relief firm dedicated to giving you the best results regarding resolving your tax debts. Our team of qualified professionals is available round the clock to provide you with the assistance you need. Contact us now at 888-585-8629 or 617-430-4674 or send us an email at

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Internet subscribers, users, and online readers are advised not to act upon this information without seeking the service of a professional accountant. Any U.S. federal tax advice contained in this website is not intended to be used for the purpose of avoiding penalties, of any kind, under U.S. federal tax laws.