Franchise tax is a state-level tax imposed on businesses for the privilege of operating as a corporation or LLC in a particular state, often based on a company's revenue or assets.
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Last Updated: February 11, 2026
A franchise tax is a cost that a business owner must pay for the privilege of doing business or existing in a certain state. Only certain states impose a franchise tax, and some businesses are exempt from it. This guide explains the basics of a franchise tax, including what it is, where it’s imposed, and more.
A franchise tax is a tax imposed by some states on certain businesses for the “privilege of doing business” or incorporating in their state. For that reason, it’s sometimes called a privilege tax, but some states have other names for it as well, such as a transaction privilege tax or commercial activity tax.
Although the name “franchise tax” implies a special tax imposed only on franchises, like Jiffy Lube or Pizza Hut, that isn’t the case. It’s purely a tax on the right to operate a business in a state that has a franchise tax.
Franchise taxes are their own separate tax category, and they may be in addition to other taxes, like the state business income tax. Further, franchise tax isn’t always based on the amount of income the business earns; rather, the business may have to pay the franchise tax regardless of whether it makes a profit. Each state has differing franchise tax regulations.
Not all states have a franchise tax. As of this writing, the following states charge a franchise tax:
Some states impose a franchise tax only on certain industries. For example, franchise taxes in Hawaii, Iowa, Maine, South Dakota, Vermont, and Virginia apply only to financial institutions. In Maryland, only public utility companies must pay a franchise tax.
The types of business entities that pay franchise taxes vary significantly by state. For example, Minnesota’s franchise tax applies only to C corporations, but Texas imposes its franchise tax on a wider range of businesses, including all partnership types.
Typically, businesses that must register or incorporate with the state pay franchise taxes. This includes C corporations, limited partnerships (LPs), limited liability partnerships (LLPs), and limited liability companies (LLCs).
Foreign entities “doing business” in the state are also typically subject to franchise tax. Foreign entities are businesses registered or incorporated in a different state. To determine a foreign entity’s franchise tax liability, many states look at the nexus between the business’s activities and the state and consider a variety of factors, including:
Since a foreign entity could have a nexus with multiple states, it may have to pay franchise taxes in multiple states.
Figuring out what constitutes “doing business” in a state for an online business can get complicated. While some states provide guidance on their websites, it’s always wise to consult a professional like a CPA.
Franchise tax isn’t imposed on all business types. Sole proprietorships, general partnerships (GPs), and non-profit organizations are typically exempt. Again, this varies by state, so it’s important for an entrepreneur to understand their state’s specific tax laws.
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Not every business owes a franchise tax, but this varies by state. In general, businesses that are officially formed by registering with the state must pay a franchise tax. For example, corporations, LLCs, limited partnerships, and limited liability partnerships must register with the state and pay a franchise tax. These businesses owe franchise tax in their home state, and any other state in which they’re doing business that has a franchise tax. So, if a company does business in multiple states, it may have to pay multiple franchise taxes.
Foreign entities, which are businesses registered in a different state, also often pay franchise taxes.
Sole proprietorships, general partnerships, and non-profit organizations are often exempt from franchise taxes. Failing to pay a state’s franchise tax comes with serious penalties, like hefty fines or even losing the right to conduct business in the state. So, business owners need to check with the state to know for sure whether they’re required to pay franchise taxes or not.
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Each state has its own regulations in place for calculating franchise tax. Some have a graduated tax rate that coincides with the size of the business or its net income. Other states use a flat rate that applies regardless of the business’s income. In general, the tax is due annually — but it’s always wise to check with the state’s tax agency. Regardless of how the tax is calculated, the franchise tax benefits the state that collects it.
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It can go by a different name, but the franchise tax’s meaning is the same: it’s a payment for the privilege of using the state’s resources to run a business. The franchise tax benefits the state that collects it, and it’s just another price that entrepreneurs pay. When someone forms a business, they’d be wise to double-check what franchise tax requirements are in every area where the business operates.
ZenBusiness is here to support small business owners at every stage. Whether someone wants to streamline their startup process with a business formation plan or needs help with state compliance requirements, ZenBusiness has a product or service to help. Everything they offer is geared toward helping entrepreneurs create, run, and grow a company.
Some states require LLCs to pay a franchise tax, so it’s wise for entrepreneurs to check their state’s specific laws for local guidance.
States typically impose penalties and interest for non-payment of franchise taxes, which are often a percentage of the unpaid tax amount.
Typically, a business pays its franchise taxes to the state’s department of revenue, comptroller’s office, or whichever state department governs tax payments. Most tax department websites have portals to register to pay franchise taxes online.
A franchise tax is a tax solely for the privilege of doing business in a state, and it has nothing to do with whether the business makes money in the state. Gross receipts tax, on the other hand, is a tax on a business’s gross sales (regardless of their source) before any deductions are taken, so it depends on the amount of income the business makes.
Generally, franchise taxes are paid annually, but it’s a good idea for entrepreneurs to consult their state’s specific laws.
Franchise tax liability varies by state, entity type, and industry. To determine if a business is eligible for this tax, the owner may want to consult their state tax department’s website. States often want the franchise tax payment along with the business’s annual or biennial filing reports, if required. Failure to meet the state’s deadlines can result in severe penalties. ZenBusiness offers a helpful annual report service that can assist with this step.
This varies by state, but often unregistered entity types and non-profit organizations are exempt from franchise taxes.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. For specific questions about any of these topics, seek the counsel of a licensed professional.
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