TL;DR: Franchise tax is a state-imposed tax on business entities for the privilege of being formed or conducting business within that state. It is distinct from income tax, and liability may arise even in years when the business operates at a loss. Whether a business owes franchise tax depends on its entity type and its registration or nexus in each applicable state. States such as Delaware, Texas, California, New York, Illinois, and Tennessee impose franchise taxes, each with specific calculation methods and deadlines.

Many business owners first encounter franchise tax through an unexpected notice from a state where their entity is registered, often before the company has generated revenue. While the initial tax amount may be modest, failure to address it can result in the state's forfeiture or suspension of the entity. This has the potential to disrupt financing, delay contracts, and escalate a minor tax obligation into a complex reinstatement process.

Here, we explain the fundamentals of franchise tax, including which entities are subject to it, state-specific calculation methods, and filing requirements across all relevant jurisdictions. All figures in the accompanying state table are sourced from the respective agencies and are current as of October 2026.

What is franchise tax?

Franchise tax is a state-imposed tax on business entities for the right to exist as a legal entity or to conduct business within the state. Some jurisdictions refer to it as a privilege tax, while Texas designates its version as the margin tax. The term "franchise" in this context refers to the legal privilege granted by the state, not to franchised business models.

Franchise tax vs. income tax

In certain states, the distinction between franchise tax and income tax is less clear. For example, California's corporation franchise tax functions similarly to a corporate income tax but includes an $800 minimum. In New York, the Article 9-A franchise tax serves as the primary corporate tax. Texas does not impose a corporate income tax; instead, its franchise tax fulfills this role.

Business owners should exercise prudence about franchise tax notices. Due to the unfamiliar terminology, legitimate notices are sometimes mistaken for unsolicited mail, and fraudulent solicitations are common. Delaware's Division of Corporations advises treating any notice not issued by the state or your registered agent with caution. Payments should be made exclusively through the official state portal, not via links in unsolicited correspondence.

Who pays franchise tax?

Franchise tax liability is determined by two primary factors: the entity type and the nature of the entity's connection to the state.

Entity types that usually pay

Corporations, including both C and S corporations, are most frequently subject to franchise tax. Many states also impose franchise tax on LLCs. For example, California assesses an $800 annual tax on LLCs; Delaware imposes a flat annual tax on LLCs, LPs, and general partnerships; Arkansas charges LLCs $150; and both Texas and Tennessee tax LLCs as entities. Sole proprietors who have not registered a formal entity are generally not subject to franchise tax. For further analysis of how entity structure impacts ongoing state obligations, refer to our LLC versus corporation guide.

Home state vs. states where you are foreign qualified

Franchise tax obligations are not limited to the state of formation. In most states that impose franchise tax, entities registered as foreign entities or with sufficient nexus are also subject to the tax. For example, a Delaware corporation headquartered in California with operations in Texas may incur franchise tax liabilities in all three states within the same year.

In many states, registration alone triggers franchise tax liability. For instance, California's Franchise Tax Board requires payment of the $800 annual LLC tax regardless of business activity, until the LLC is formally canceled. Entities registered for transactions that do not proceed will continue to incur tax obligations until a formal withdrawal or dissolution is filed. Accordingly, foreign qualification, dissolution, and withdrawal should be considered alongside franchise tax compliance.

Who is usually exempt

Most states exempt qualifying nonprofit organizations from franchise tax. Small entities may also be exempt if they fall below certain thresholds; for example, Texas imposes no franchise tax on entities with annualized revenue of $2.65 million or less for 2026, and Illinois exempts the first $10,000 of franchise tax liability. However, exemption from tax does not typically equate to exemption from filing requirements. In Texas, entities below the threshold must still submit a Public Information Report or Ownership Information Report, and failure to file can result in forfeiture of the entity.

How states calculate franchise tax

There is no national formula. Almost every state uses one of five bases:

1. Flat amount. Arkansas LLCs pay $150. Delaware LLCs pay $400 for the 2026 tax year.

2. Shares or capital stock. Delaware corporations use authorized shares or assumed-par-value capital. Illinois uses paid-in capital.

3. Net worth. Tennessee charges 0.25% of apportioned net worth with a $100 minimum. North Carolina and Alabama also use net worth.

4. Margin or gross receipts. Texas taxes margin at 0.75%, or 0.375% for qualifying retailers and wholesalers.

5. Income with a minimum. California charges corporations the greater of net income times the tax rate or $800. New York charges the highest of the three bases, with a fixed dollar minimum ranging from $25 to $200,000.

The Delaware example every startup should see

Delaware corporations can compute tax two ways and pay whichever is lower. The default method on the state's notice is the Authorized Shares Method, and it punishes companies that authorize millions of shares, which most venture-backed startups do.

Illustration: a corporation authorizes 10,000,000 shares at a tiny par value, has issued 8,000,000 and reports $500,000 in gross assets.

• Authorized Shares Method: $250 for the first 10,000 shares plus $85 for each additional 10,000, or $85,165.

• Assumed Par Value Capital Method: assumed par is $0.0625, assumed par value capital is $625,000, and the computed tax falls below the floor, so the company pays the $400 minimum.

In this example, the difference between calculation methods exceeds $84,000 for the same company in the same year. To ensure the lower tax is applied, the company must file the annual report with the correct number of issued shares and total gross assets, allowing Delaware to recalculate the liability. Many businesses overpay or overlook this option due to lack of awareness of the alternative method.

Franchise tax by state: 2026 reference table

This table covers states that levy a franchise tax or a close equivalent on general business entities. Amounts are for the 2026 tax or report year unless noted.

States that repealed or are phasing out franchise tax

The list keeps shrinking, so a table from two years ago is probably wrong. Louisiana repealed its corporation franchise tax for periods beginning on or after January 1, 2026, though earlier periods remain due. Oklahoma ended its franchise tax for tax years starting in 2024. Mississippi is stepping its rate down to zero by 2028. West Virginia and Pennsylvania phased theirs out years ago.

Everywhere else

The absence of a franchise tax in a state does not eliminate annual compliance costs. For example, the District of Columbia refers to its corporate income tax as a franchise tax, Wyoming imposes an annual license tax based on in-state assets, and Ohio, Washington, and Nevada tax gross receipts. Additionally, nearly all states require payment of annual or biennial report fees. For further details, refer to our guide on annual report filing requirements by state.

Key states in detail

Delaware. Corporations file the annual report and pay franchise tax for the prior year by March 1. Late filers pay a $200 penalty plus 1.5% interest per month on tax and penalty. Corporations owing $5,000 or more must make estimated payments: 40% by June 1, 20% by September 1, 20% by December 1, and the rest by March 1. LLCs file no annual report but pay the flat annual tax by June 1. The most common mistake we see is treating these as a single obligation: a Delaware LLC and a Delaware corporation have different amounts, dates, and portals. If you are forming one, see how to form an LLC in Delaware.

Texas. Reports are due May 15. For 2026 and 2027 reports, entities with annualized revenue at or below $2.65 million owe no tax but must still file an information report. The Comptroller charges a $50 penalty for each late report, 5% of the tax if paid 1 to 30 days late, and 10% after that. Entities that fail to meet filing requirements have their registration forfeited by the Secretary of State and must be reinstated.

California. Every LLC organized, registered, or doing business in California pays the $800 annual tax by the 15th day of the 4th month of its tax year. The first-year LLC exemption applied only to tax years beginning in 2021 through 2023, so new LLCs should budget for the full $800. Corporations still get a first-year exemption from the minimum tax. LLCs with California income of $250,000 or more also owe a separate LLC fee, estimated by the 15th day of the 6th month.

New York. Article 9-A corporations compute tax on business income, business capital, and a fixed dollar minimum, then pay the highest. A loss-making company with $3 million in New York receipts still owes the $1,500 fixed dollar minimum.

Illinois. The franchise tax is paid to the Secretary of State with the annual report and is based on paid-in capital. Since 2025, the first $10,000 of liability is exempt, which eliminates the bill for many smaller corporations, but the annual report itself is still required.

How to file franchise tax: a six-step workflow

The following process embodies the standard annual workflow implemented by experienced compliance teams, regardless of the number of entities managed.

1. Inventory all registrations by listing each entity, its state of formation, and every state where it is foreign qualified. Unrecognized obligations frequently arise from overlooked registrations.

2. Map each registration to its regime. Note the tax name, base, agency, and due date for every state in the table above that applies.

3. Gather all required inputs in advance. Delaware's lower-tax calculation requires issued shares and total gross assets; Texas requires total revenue and margin; Tennessee and North Carolina require net worth. Delaying data collection until the filing deadline often results in use of the default, and potentially higher, calculation method.

4. Calendar every date, including estimates. Annual deadlines, quarterly estimates, and the tax report all go on one corporate compliance calendar.

5. File and pay through the official portal. Keep the confirmation, the computation, and the report in one place.

6. Confirm good standing. After filing, pull a certificate of good standing online for any entity you are about to use in a financing, acquisition, or new registration.

For entities seeking to automate this process, CoverPin's free compliance calendar tracks all relevant deadlines for each entity and provides advance alerts. Our tax filing service is also available to manage the filing process on your behalf.

What happens if you miss a franchise tax deadline

Most states follow a similar sequence for missed franchise tax deadlines: initial penalties and interest, followed by loss of good standing, and ultimately forfeiture, suspension, or administrative dissolution. Each subsequent step increases the difficulty and cost of reinstatement.

The main risk is not the penalty itself, but the loss of good standing. Entities that are not in good standing are generally unable to obtain a good standing certificate, which lenders, investors, and acquirers often require. The entity may also lose the right to initiate legal actions in that state's courts. Reinstatement typically requires filing all missed reports, paying outstanding taxes and penalties, and submitting a reinstatement application.

An additional, often overlooked, cost arises when inactive entities continue to accrue franchise tax obligations. If a subsidiary or foreign registration is no longer needed, formal dissolution or withdrawal is typically more cost-effective than incurring another year of minimum tax. For further analysis, see our discussion of the costs associated with improperly dissolving a business entity.

Managing franchise tax across many entities

Managing franchise tax is simple for a single entity in one state, but complexity increases significantly when multiple entities operate across several states. Responsibilities are often divided among departments: tax prepares the computation, legal manages the annual report, the registered agent receives notices, and finance processes payments. Without centralized supervision, deadlines might be missed due to gaps in responsibility.

Effective compliance teams implement three key practices: maintaining a centralized record of all entities, registrations, and deadlines; linking franchise tax obligations to related requirements such as annual report filings, registered agent services, and good standing; and conducting annual reviews to dissolve or withdraw entities that are no longer necessary. Utilizing dedicated entity management software streamlines these processes and reduces the risk of oversight. For a complete overview of multi-state tax obligations, refer to our guide on multi-state tax compliance.

Remaining Compliant with Franchise Tax in 2026

While franchise tax is seldom the largest financial obligation for a company, it is among the most frequently overlooked, and noncompliance jeopardizes the entity's legal standing. Identify which registrations trigger franchise tax, utilize the calculation method that minimizes liability, and keep a comprehensive compliance calendar for all relevant deadlines.

CoverPin's software is available at no cost. By adding your entities, you can consolidate franchise tax, annual report, and registered agent deadlines for all 50 states into a single compliance calendar. Expert support is available for filings that call for human intervention. Begin for free to gain a complete overview of your compliance obligations.

Frequently asked questions

Do I owe franchise tax if my business made no money?

Often yes. Franchise tax is based on the privilege of existing or doing business, not profit. California's $800 minimum, New York's fixed-dollar minimum, and Delaware's flat LLC tax all apply in a loss year.

Does an LLC pay franchise tax?

In many states, yes. California, Delaware, Arkansas, Texas, and Tennessee all tax LLCs in some form. In other states, LLCs pay only an annual report fee.

Do I pay franchise tax in every state where I am registered?

You pay franchise tax in each state where you are formed, registered as a foreign entity, or have sufficient nexus. Registration in a state without a franchise tax usually means an annual report fee instead.

When is Delaware franchise tax due?

March 1 for corporations, covering the prior year. June 1 for LLCs, LPs, and general partnerships. The 2026 LLC tax of $400 is due June 1, 2027.

What is the Texas no-tax-due threshold for 2026?

$2.65 million in annualized total revenue for 2026 and 2027 reports. Entities at or below it owe no tax but must still file an information report by May 15.

Is franchise tax deductible?

State franchise taxes are generally deductible as a business expense for federal income tax purposes. Confirm treatment for your entity with your tax advisor.

How do I stop owing franchise tax in a state I have left?

File a formal withdrawal of a foreign registration or a dissolution of a domestic entity, and file a final return where required. Texas, for example, requires a final report within 60 days after an out-of-state entity ends its nexus.