File Your Franchise Tax
Pay What the State Requires.
Many states impose a franchise tax on businesses for the privilege of operating or being registered within their borders. Manay CPA calculates your franchise tax liability in every applicable state, identifies every available deduction and calculation method, and files your return on time.
- Franchise tax calculation and filing in all applicable states
- Alternative calculation method analysis to minimize liability
- Available for corporations, LLCs, and other taxable entities
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What Is a Franchise Tax?
A franchise tax is a state-imposed tax on the privilege of doing business or being legally registered in a state. It is not a tax on franchise businesses — the name refers to the legal franchise, or right, granted by the state to operate as a registered business within its borders. Franchise taxes are imposed by many states — including Delaware, Texas, California, and others — and apply to corporations, LLCs, and other business entities separately from any state income tax obligation.
Franchise tax calculation methods vary by state. Delaware calculates franchise tax for corporations based on authorized shares or assumed par value capital — two different methods that can produce dramatically different tax amounts. Texas imposes a franchise tax — called the margin tax — based on gross revenue minus certain deductions. California imposes an $800 minimum franchise tax on LLCs regardless of income. Manay CPA analyzes every available calculation method and files using the approach that minimizes your liability while fully complying with state law.
Steps
Franchise Tax Analysis
We identify every state where your business has a franchise tax obligation based on your registration status, revenue, and entity type, and we determine the applicable calculation method and tax rate for each state.
Method Comparison
For states that offer alternative calculation methods — particularly Delaware, where the difference between methods can be tens of thousands of dollars for certain corporations — we calculate the tax under every available method and select the one that produces the lowest lawful liability.
Return Preparation
We prepare your franchise tax return for each applicable state with accurate financial information and filing on time before the state deadline, paying the calculated liability and providing confirmation of filing for your records.
Record Maintenance
We document the franchise tax payment for your financial records, advise on estimated franchise tax payments where required, and set up the filing calendar for subsequent years so the obligation is met on time every year going forward.
Table of Contents
Delaware Franchise Tax Is One of the Most Misunderstood Business Taxes
Delaware charges a franchise tax on every corporation incorporated in the state — which includes a very large number of U.S. startups and established businesses that incorporate in Delaware for its legal and governance advantages. The Delaware franchise tax has two calculation methods: the authorized shares method and the assumed par value capital method. Many businesses receive an alarming preliminary tax bill from Delaware calculated under the authorized shares method — which can run to tens of thousands of dollars for corporations with a large number of authorized shares.
However, the assumed par value capital method almost always produces a dramatically lower franchise tax for startups and early-stage companies with many authorized but few issued shares. The minimum Delaware franchise tax under this method is $400. Manay CPA calculates Delaware franchise taxes under both methods for every client and files using the method that produces the lower liability.
Texas Imposes a Margin Tax Rather Than a Traditional Franchise Tax
Texas does not impose a corporate income tax, but it does impose a franchise tax on most businesses with a nexus in the state. The Texas franchise tax — called the margin tax — is calculated based on the lesser of three calculations: 70 percent of total revenue, total revenue minus cost of goods sold, or total revenue minus compensation. The resulting taxable margin is then multiplied by the applicable tax rate, which varies by industry.
Businesses with Texas revenue below the no-tax-due threshold — which changes annually — owe no franchise tax but must still file a return. Manay CPA calculates the Texas margin tax under all available deduction methods, identifies whether the no-tax-due threshold applies, and files the return with the correct supporting schedules.
California's $800 Minimum Applies Even to Businesses with No Income
California imposes an $800 annual minimum franchise tax on every LLC registered or doing business in the state — regardless of whether the LLC generated any income during the year. This minimum applies even to LLCs that had no revenue, no activity, and no employees. The only exemption is for an LLC’s first taxable year of existence in California.
For businesses that are registered in California but not actively operating there, the $800 annual minimum can be a surprise obligation. Manay CPA advises clients on California’s franchise tax minimum, manages the annual filing, and advises on the circumstances under which a California registration can be terminated to eliminate the ongoing obligation.
Franchise Taxes Are Separate from State Income Taxes
Business owners sometimes assume that paying state income tax satisfies their franchise tax obligation, or that paying franchise tax eliminates any state income tax liability. These are separate taxes, imposed by different state agencies, calculated differently, and filed on different forms. A business can owe both state income tax and franchise tax in the same year, and failure to file either is a separate compliance violation.
Manay CPA manages both franchise tax and state income tax obligations for every client in every state where they apply, ensuring that both obligations are identified, calculated correctly, and filed on time as part of a comprehensive state tax compliance program.
Frequently Asked Questions about Franchise Tax
Which states impose a franchise tax?
States that impose a franchise tax or similar annual tax on registered businesses include Delaware, Texas, California, New York, Illinois, Alabama, Arkansas, Louisiana, Tennessee, and several others. The specific tax, its name, and its calculation method vary by state. Some states impose the franchise tax in addition to an income tax. Others — like Texas — impose the franchise tax in lieu of an income tax. Manay CPA identifies every franchise tax obligation for your business based on your registration status and business activities.
What is the Delaware authorized shares method and why is it so expensive?
The Delaware authorized shares method calculates franchise tax based on the number of shares a corporation is authorized to issue — not the shares it has actually issued. A corporation that has authorized 10 million shares pays significantly more under this method than one with 1 million authorized shares. For startups that authorize a large number of shares at formation to accommodate future stock grants and investor rounds, this can produce a franchise tax bill of tens of thousands of dollars. The assumed par value capital method almost always produces a dramatically lower result.
Does my LLC owe franchise tax in Delaware?
Delaware LLCs pay an annual flat tax of $300 rather than a franchise tax calculated on shares. This is separate from the corporation franchise tax and is due by June 1 each year. Delaware LLCs that fail to pay the $300 annual tax will be placed in bad standing with the state and will eventually be voided.
Is the franchise tax deductible as a business expense?
Yes. State franchise taxes are generally deductible as ordinary and necessary business expenses on the business’s federal income tax return. This deductibility reduces the net cost of the franchise tax obligation. Manay CPA accounts for franchise tax deductibility in the overall tax planning for every client subject to state franchise taxes.
What happens if I don't pay the franchise tax?
Failure to pay the franchise tax results in penalties, interest, and ultimately the placement of your business in bad standing with the state. A business that remains delinquent on franchise tax for an extended period will be administratively dissolved or have its certificate of authority revoked. Reinstatement requires payment of all back taxes, penalties, and interest. Manay CPA prevents this by managing franchise tax filings and payments on time every year.
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