Understanding Franchise State Tax

“I am proud to be paying taxes in the United States. The only thing is – I could be just as proud for half the money.” — Arthur Godfrey, entertainer

Franchise State Tax

We include a famous quote on every blog entry and this time we found the ideal quote, of all places, buried in the IRS website! Yes, they have a famous quote section on the subject of taxes and some are hysterical. Kudos for the sense of humor to whoever approved such posting :)

The Franchise State Tax simply refers to the fee imposed by a State for having the privilege to register and do business within their borders. Many States seriously collect half, or less than half than other States in their flat fee assessments to LLC’s.

In California for example, you are going to fork out $800 per year for the benefit of doing business here. Yup, we are located in SoCal so we feel the pain and as much as we are proud to contribute “we could be just as proud for half the money” indeed. Delaware by comparison has a flat rate of $300 for LLC’s and Corporations can use a couple of formulas to choose from (amount of authorized shares or the par value method) to calculate their annual liability. Wyoming sits on the lower end with a minimum of $50 filing fee on the annual report and it does charge a franchise tax if, and only if, the company owns property in Wyoming. Texas has a comprehensive Franchise State Tax structure that also makes it sit on the lower end up to $10 Million in annual revenue.

Foreign Entity Registrations

Once we have figured out what a FST is, we can move on to the obligation to register your, as an example, Delaware Corp if you are operating in California. There is really no way around it and California enforces these regulations diligently. As result you find yourself on the hook for the two Franchise State Taxes. Which is not a bad thing if your reality and strategy calls for this type of combination. The “ouch” factor arises when you either didn’t know or simply didn’t register and the tax man comes to collect all of a sudden. Rule of thumb, plan ahead and budget your annual liabilities accordingly. As you research and read more about it you will get familiar with the theory of nexus, which is simply the degree of connection that you have with a State when conducting business. California’s definition is quite broad, but there are some - if few - exceptions that will be the topic of a separate entry. Plan for such registrations as simply another business expense and avoid getting too creative. It does’t mean you can’t get uber creative if you so choose to, we just wouldn’t risk it.

Finally, do not forget that on top of your Federal Income Tax and local Franchise State Tax, States also impose taxes on corporate AND personal income at varying rates and using a wide variety of methods. Sales tax is also an item to consider as you complete your tax research. Consult with your accountant if you have reached this point but still have a growing itch on the subject.