A franchise tax is a tax that states levy on corporations and business entities for the privileges of conducting businesses in the respective states. The franchise tax is also referred to as the Privilege tax. Franchise Taxation is specific to states. On a whole, it gives businesses the ability to be licensed and operate within the said state limits.
Franchise taxation varies from state to state. Not all states impose a franchise tax. Some states exempt some categories of business from the franchise tax. These could be non-profit corporations, fraternal associations, or some Limited Liabilities Corporations (LLCs). Some states also exempt smaller companies from the tax. Following is the list of states that cannot go without a franchise tax system:
- Alabama
- Arkansas
- California
- Delaware
- Georgia
- Illinois
- Louisiana
- New York
- Texas
Who pays the Franchise Taxes?
Franchise Taxes are subject to what kind of business operations is being carried out or planned to be carried out. Corporations, Partnerships, and other corporate entities such as LLCs. As mentioned above, there are establishments that are exempted from Franchise taxation as well, and that includes businesses operated by just one person or sole proprietors.
It becomes viable for institutions to thoroughly understand the terms and conditions that suffice for the payment or exemption of Franchise tax. Moreover, it is equally important to understand that franchise taxes do not replace any federal or state income taxes.
Franchise taxation is paid annually with state legislation.
Take Away from the above exert
- Franchise Taxes donot replace Federal or state income taxes.
- Franchise Tax must be paid annually.
- Businesses operating and registered in multiple locations (states), pay franchise taxes based on their locations.
- Sole Proprietors, Small companies, Non-Profit Entities, etc are exempted from Franchise Tax.
Factors Determining the Franchise Taxes:
Each state has different sets of criteria that determine Franchise taxes. The following is a list of those factors, (inclusive of these factors but not limited):
- Gross Assets
- Net Worth
- Income
- Shares and Stock’s Par Value
- Flat Fee rate
- Gross Receipts
- After-tax investment on tangible personal property
There are other variables in addition to the above, specific to the state the business is registered in. In some states, franchise taxation relies on a flat rate. This calculation is made by simply looking at the type and size of the business. A simple and effective way to calculate this is by using a percentage of the business’s net worth, gross receipts of the business for the tax period, and a percentage of the assets. However, it is not related to any company’s income or profit in a given fiscal year.
Most states have calculators as well as detailed specifications underlying the franchising taxation regulations. Each state calculates its taxes differently.
Depending upon where a business is paying the franchise tax, different departments within that state government may be responsible for collecting that tax. Alike income tax, failure to pay franchise tax can result in penalties that can adversely impact the business, for example losing the business standing. In regards to the franchises, failure in tax payment can result in an LLC losing its protections, and the owners or management could be financially liable.
Business owners can consult with corporate lawyers and consultants to avoid any such adversities.
Understanding legalities can be a tedious process and more so often legalities involve businesses located and operating in more than one state in the U.S. Business entities need to keep themselves updated at all times and prioritize the legalities at all given times.
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