| 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 this? We don’t own 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?Franchise Tax is an annual tax that the state charges for your entity to exist. What is an ‘entity’? An entity is anything the Secretary of State formed. This could be an LLC, a corporation, or some variation of these. Sole proprietors do not pay franchise tax. Only LLCs, corporations, and other entities used for businesses. Why do I have to pay it? The tax is only for the protection of the name and allowing the entity 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 or if you are using it to operate a business. I often use the analogy of your LLC or corporation 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, results, or operating a business. It is merely to exist. How much is it?About 20 states charge franchise tax, and it varies widely from state to state. In Arkansas, LLCs are $150 per year and corporations are based on company assets and outstanding stock shares. California is a minimum of $800 per year. Missouri has a $25 fee for filing an annual report. Every state is different. When and how do I pay this?The best place to start is your Secretary of State or Franchise Tax Board in your state. In Arkansas, it 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. Are you in Arkansas? Here’s a step-by-step video. SummaryFranchise tax is the fee for your LLC or corporation to exist in your state as a separate entity. Only about 20 states charge franchise tax. Usually paid to the Secretary of State. For more in this series on business taxes, click here |
