Franchise tax surprises a lot of new business owners — it is not based on profit, and you can owe it even with zero income. Here is what it is and who pays.
What franchise tax is
It is a fee for the privilege of existing or doing business in a state — separate from income tax. Some states base it on net worth or capital, some on revenue, and some charge a flat amount.
It is not income tax
You can owe franchise tax in a profitable year and a loss year alike. A Delaware LLC, for example, owes a flat annual franchise tax regardless of activity.
Which states charge it
Many do, under various names (franchise tax, privilege tax, annual report fee), and the amount varies widely — from a small flat fee to a calculation on capital or margin. A few states charge none.
Avoiding penalties
- Know your state's due date and amount before it is late
- Budget for it even in a no-revenue year
- File the annual report that often accompanies it
Compare what a state costs to maintain with the LLC Cost Estimator, and let a CPA & EA team track your annual filings.
How franchise tax is calculated
There's no single method. Some states charge a flat annual fee, others base it on your net worth, capital, or margin, and a few don't charge it at all.
Delaware, for example, charges LLCs a flat annual franchise tax, while its corporations use a more complex calculation.
Because the basis varies so much, the only reliable approach is to check the specific rule for each state where you're registered.
Franchise tax for out-of-state and foreign owners
If you register your LLC in one state but operate in another, you may owe franchise tax or annual fees in both — your formation state and any state you're foreign-qualified in.
Non-resident owners are not exempt; the obligation attaches to the entity, not the owner's residency.
Mapping where you're registered against where you actually owe avoids surprise bills and penalties.
Franchise tax is not a tax on profit
The name is misleading. A state franchise tax is generally a fee for the privilege of existing as a registered business in that state — not a tax on your income. That means you can owe it even in a year with zero revenue, which surprises many new owners.
- It is charged for being registered, regardless of activity.
- It can be a flat fee, based on net worth, or based on shares or capital.
- It is separate from, and on top of, any state income tax.
Because rules differ by state, always verify with your state's tax authority or Secretary of State; the IRS's state government websites directory links to each one.
Which states charge it and how much
The structure varies widely. California imposes an $800 minimum on LLCs and corporations regardless of income. Delaware charges an annual franchise tax (and a separate LLC tax) that must be paid to stay in good standing. Texas runs a margin-based franchise tax with a no-tax-due threshold. Some states have no franchise tax at all.
Always check your formation state and any state where you have foreign-qualified. The best state to form a US LLC guide weighs these costs against the benefits.
How to avoid penalties
Franchise tax usually has a fixed annual deadline tied to your formation date or a calendar date. Missing it adds penalties and interest and can put your entity out of good standing — which blocks financing, contracts, and even lawsuits until cured. Calendar the deadline and pay on time.
Franchise tax during formation and dissolution
You start owing franchise tax once the entity exists, and you keep owing it until you formally dissolve — not when you simply stop using the company. If you are winding down, see how to dissolve a US LLC the right way to stop the clock. For ongoing obligations after you form, see US LLC compliance after formation.
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Read the guide →Frequently asked questions
What is state franchise tax?
It's a fee for the privilege of existing or doing business in a state, separate from income tax. You can owe it even in a year with no profit.
Which states charge franchise tax?
Many do, under various names and methods, while a few charge none. The amount ranges from a small flat fee to a calculation on capital or margin.
Do I owe franchise tax if my business made no money?
Often yes. Franchise tax is usually not based on profit, so it can apply even in a loss year or a dormant year.
Can I owe franchise tax in more than one state?
Yes. If you're registered or foreign-qualified in multiple states, you may owe annual fees or franchise tax in each.