What Is Franchise Tax?

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One of the things that cause most businesses to fail in their in first year is their start-up costs. While this problem can stem from purchasing a large inventory or leasing a prime location, many business owners are unaware of many taxes that may and will be applicable to them, such as franchise tax.


Franchise tax is not a tax on income; instead it is a tax on any corporation that conducts business in a state. Each state has different rules and regulations for franchise taxes, but all states never adjust the amount you are taxed by how much or how little you make.


In most states, if you are registered as a corporation within the state for even an hour, then you are eligible to be taxed with franchise tax. This includes corporations, both public and private, and limited liability corporations.


The amount charged varies dramatically between states. For instance, Delaware, a state which doesn’t charge income tax, charges a very high fee annually to corporations in the form of franchise taxes. Nevada, a state that charges income tax, does not charge corporations for a franchise tax.


To pay your franchise tax, you can mail and contact the treasury of the state your corporation is registered in. To keep in good standing, ensure that your payment is mailed or paid electronically before the date it is given. Most states require the document to be in their possession by the deadline as opposed to just be postmarked by the deadline.

Expert Insight

There are positives and negatives to founding a corporation in a state with a high franchise tax. In most cases, the states offer tax breaks or incentives to compensate for this difference, while in some situations, such as a small business, the business will be better off paying a lower annual franchise tax and a larger income tax.