Franchise Tax is an annual tax that the state charges for your entity to exist.
One day, I got a call from a lady who got a reminder letter to pay her Franchise Tax. “Why do I have to pay Franchise Tax? We don’t have a franchise. We have our own store.”
It sounded so obvious when she said it, but tax lingo doesn’t always make sense. Franchising a business (like a Subway or a Burger King) has nothing to do with Franchise Tax.
What is Franchise Tax?
Going back to the definition of Franchise Tax (an annual tax that the state charges for your entity to exist), what is an entity? Anything you had the Secretary of State form that could be a business. This is usually an LLC or a corporation or some variation of these two.
Why do I have to pay it? The tax is only for the protection of the name and allowing the entity to continue to exist. It doesn’t matter if you “didn’t use it”, “didn’t make any money”, “closed that business years ago”, or “never started anything with it”. You still must file the form and pay annually. They are not concerned with activity.
I often use the analogy of your business being your baby. You formed an entity with the Secretary of State. The state is your entity’s baby-mama. You need to pay the state child support for your baby every year no matter if you see the kid or not, or whether the kid grows up and makes money or fails and costs you money. Franchise Tax is not contingent on activity.
How much is it?
Franchise tax varies widely from state to state. In Arkansas (my home state), LLCs are $150 per year flat rate and corporations are based on company assets and outstanding stock shares, with a minimum of $150 per year. California is a flat rate of $800 per year. Missouri has a fee for filing an annual report, but no longer charges franchise tax. Every state is different.
When and how do I pay this?
In Arkansas, Franchise Tax is due on May 1st every year. You can file the forms online at the Secretary of State website. They need information about who is on the board of the LLC/ Corporation, who runs the company, and who is filing the form. Corporations also need to disclose value and number of stock shares. If you have the information, it takes less than 5 minutes to file and pay.
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