State Franchise Taxes: The Fee for Existing in a State
Why some states charge a business for the privilege of being registered there regardless of profit, how the main ones are computed, and how they hit an out-of-state company that registers to do business.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
A franchise tax is a state's charge for the privilege of being organized or registered to do business there, usually computed on something other than net income — capital, net worth, margin, gross receipts, or a flat amount. It is owed whether or not the business is profitable, and it applies to out-of-state companies that register in the state.
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How do the major franchise taxes work?
| State | Measure | Notes |
|---|---|---|
| Texas | Margin (the lowest of 70 percent of revenue, revenue minus cost of goods sold, revenue minus compensation, or revenue minus $1 million), taxed at 0.75 percent (0.375 percent for retail and wholesale); no tax is due at or below $2.65 million of annualized revenue for 2026 and 2027 reports ($2.47 million for 2024–2025) | Applies to LLCs, partnerships (other than general partnerships owned directly by individuals), and corporations; report due May 15; since the 2024 report year, entities at or below the threshold file only a Public Information or Ownership Information Report |
| Delaware | Authorized shares or assumed par value capital for corporations (whichever yields the lesser tax); a flat $400 annual tax for LLCs, LPs, and GPs, due June 1 for the prior year | Owed by every Delaware entity regardless of where it operates |
| California | $800 minimum franchise tax for corporations (not owed in a new corporation's first taxable year) and an $800 annual tax for LLCs from their first year, plus an LLC fee of $900 to $11,790 once total California income reaches $250,000 | Applies to any entity registered or doing business in California |
| Tennessee | Net worth apportioned to Tennessee (the alternative property measure was repealed for tax years ending on or after January 1, 2024) | Paired with an excise tax on income |
| New York | Fixed-dollar minimum for corporations based on receipts; LLC filing fee by receipts | — |
| North Carolina, Georgia, Alabama, Illinois, and others | Net worth or capital measures with minimums | Rates and bases vary; some are being phased out, and Louisiana repealed its corporation franchise tax for periods beginning on or after January 1, 2026 |
| Florida | None on capital or net worth | Its corporate income/franchise tax is measured by net income (5.5 percent) and applies to C corporations and LLCs taxed as corporations |
Who ends up paying unexpectedly?
A Florida LLC that registers in Texas to serve a customer; a startup formed in Delaware for investor convenience, paying Delaware's annual tax forever; a California remote employee creating "doing business" status for a Florida company, which then owes California's minimum tax; and an entity that stopped operating but was never dissolved in a franchise tax state.
How is the tax managed?
Register only where there is real nexus; dissolve or withdraw from states where business has ended; choose the Delaware calculation method (authorized shares versus assumed par value) that produces the lower tax; and keep state annual reports current, since franchise tax states often tie report filing to the tax.
Is it deductible?
Yes, as a business expense, and it is not subject to the federal cap on state and local tax deductions, which limits individuals' itemized deductions rather than taxes paid in carrying on a business.
Frequently asked questions
Is a franchise tax the same as a fee for a franchise business?
No. It has nothing to do with franchising; the name refers to the "franchise" of doing business as an entity.
Does an S corporation pay franchise tax?
In states that impose it on S corporations — California, Texas, Tennessee, and others — yes, even though it pays no federal income tax.
Can a franchise tax be owed for a year with no revenue?
Yes. Minimum amounts apply regardless of activity in most franchise tax states.
Does Florida's annual report fee count as a franchise tax?
No. It is a flat filing fee for keeping the entity active; Florida's only franchise-type tax is its corporate income/franchise tax, which is measured by net income and does not reach capital or net worth.
Official sources
The Texas Comptroller explains: “The Texas franchise tax is a privilege tax imposed on each taxable entity formed or organized in Texas or doing business in Texas.” — Texas Comptroller of Public Accounts, Franchise Tax, https://comptroller.texas.gov/taxes/franchise/
The Florida Department of Revenue explains: “The Florida corporate income/franchise tax is imposed on all corporations for the privilege of conducting business, deriving income, or existing within Florida. Corporations, including entities that are taxed federally as corporations, are subject to the tax.” — Florida Department of Revenue, Florida Corporate Income Tax, https://floridarevenue.com/taxes/taxesfees/Pages/corporate.aspx
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our U.S. Tax Desk tracks franchise tax exposure in every state where a client is registered and withdraws registrations that no longer serve a purpose. See pricing or book a free fit call.
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