Franchise Tax

A franchise tax is a state tax on businesses.

We’d love to be more specific than that, but the rules vary so much between states that it makes it difficult. Or extra fun, depending on how one sees the world.

Like...if our company is chartered in a particular state, we’re going to pay a franchise tax there. But in some states, we have to pay a franchise tax just for doing business there, even if our organizational home state is somewhere else. Oh—and what do we mean by “doing business?” Well, that can vary from state to state as well.

And how each state calculates the franchise tax varies too, which only adds to the fun. In some states, it’s a flat fee; in others, it’s based on the company’s net worth. And in still others, it’s based on the value of our capital stock. Some like to get fancy and use a combination of calculations.

It’s worth pointing out two important things about franchise taxes. First, not all types of businesses have to pay them. Sole proprietorships and certain non-profits, among others, are usually (but not always) exempted. And second, franchise tax does not equal corporate income tax. Corporate income tax is based on how much our business makes and is subject to different rules and regs.

So basically, a franchise tax is a simple concept with a bunch of complicated permutations. If we’re looking to set up or expand a business, it’s most definitely worth checking out how franchise taxes might affect our big plans.