Franchise tax is levied on businesses that are organized or registered to operate in the state. (In some states, this tax is called a privilege tax.) The excise tax is separate from the state and federal income taxes that need to be filed each year.
Being able to operate as an LLC or corporation comes with certain advantages, such as limited liability. Franchise tax can be thought of as a fee charged by the state to provide the statutory authority that allows these business entities to organize or register in the state.
There are some key differences between excise tax and income tax. Unlike state income tax, franchise tax is not based on a company's profits. A business entity must file and pay franchise tax, regardless of whether it is profitable in any given year.
The method of calculating excise tax varies from state to state, whether you are an LLC, corporation, or other entity type. For example, some states only require C corporations to pay franchise tax. Determining the amount of excise tax may be based on the following:
Gross income. Net worth.
The number of issued shares of the company** and the par value of those shares.
A combination of the above.
Fixed fee. A tax nexus is the part of a jurisdiction that taxes a business and can arise from a variety of activities, including sales and use tax, income tax, and franchise tax.
The due date for the company's annual report and franchise tax also varies from state to state. In many cases, the franchise tax is due at the same time as the annual report. Many states tie the expiration date to the anniversary date, making it expire in the same month that the business is incorporated or qualified as a foreign state. For example, if an LLC is incorporated on February 15, the LLC's annual report and franchise tax due date will be February of each year.
Other states choose the date on which the annual report and/or excise tax is due, which may vary from one to the other for all business types or from business type. Delaware is an example: the franchise tax for corporations is due on March 1, and the due date for LLCs is June 1.
Business owners who fail to pay their franchise tax may face consequences that affect their overall business, so you must pay all taxes owed. If you don't pay taxes, you may receive a notice from the department responsible for tax collection. If the taxes remain unpaid, then you may face a tax lien.
Some states also require LLCs and corporations to file an initial report shortly after formation or formation. Initial list collection businesses are not required to include data in their incorporation or registration documents (such as the name and address of the company's management), but the initial report is usually subject to a state filing fee.