A Texas limited liability company is subject to a franchise tax, as is every taxable business entity organized or chartered in Texas or doing business in the state. But limits on the tax owed give a break to small businesses. Unlike the federal tax treatment of LLCs, there is no pass-through of the LLC's franchise tax to the company's owners' individual tax returns.
"No Tax Due" Threshold
LLCs and other eligible entities do not owe the franchise tax if the company's annualized total revenue is $1 million or less, as of returns due in 2011. It the company calculates that the tax due is less than $1,000, it also doesn't owe the tax. The company must still file all state-required reports.
Determining the Tax Base
The company has three options to figure its tax base for the franchise tax: multiply its total revenue by 70 percent; subtract the cost of goods sold from total revenue; or subtract compensation from total revenue. An LLC can deduct up to $320,000 per person for compensation (including net distributive income) to LLC members, as owners are called. The distributive income can be deducted even if no actual distribution to a member was made. LLCs, under federal default rules, cannot pay their members wages.
The franchise tax for most business entities, according to the Texas Comptroller, is 1 percent of the tax basis, and .5 percent for qualifying wholesalers and retailers. Wholesalers and retailers are qualified to use the .5 percent rate if their total revenue from wholesale and retail is greater than from other activities, and except for restaurants and bars, less than 50 percent of their of their sales are from products they produce. A business that provides retail or wholesale utilities including electricity, gas or telecommunication services does not qualify for the .5 percent rate.
If a company has an annualized income of $10 million or less, it can use the "E-Z computation" to come up with the portion of the company's total revenue earned in Texas. The company cannot subtract the cost of goods sold or compensation amounts from this figure when using the E-Z computation. To figure the tax, multiply the Texas revenue by 0.575 percent.
No Income Tax
Texas does not have an income tax, so LLC members who pay federal income tax on their share of the company's profits do not pay any state tax on their personal tax returns. The LLC, however, will have to pay payroll and applicable sales and use taxes imposed by the state and local governments in purchases for the business.