Franchise tax is the fee a state charges your LLC for the privilege of existing there. It is not a tax on your income. You owe it whether you turned a profit, broke even, or lost money — and in some states whether or not you did any business at all. Think of it as rent for being on the state’s register.
How much you pay swings wildly by state, and that’s the whole story. Delaware charges a flat $300. California charges a minimum of $800 every single year. Texas charges a percentage of your margin but only above a high threshold. Wyoming and New Mexico charge nothing. Founders who form in one state expecting “no taxes” and operate in another get caught by this constantly. Here’s how it works and where the traps are.
Privilege to exist, not a tax on profit
The label confuses people because “franchise” has nothing to do with franchising a business. It’s an old legal term for the privilege a state grants when it lets your company exist and operate under its laws. The tax is the price of that privilege.
That’s why it decouples from income. An income tax asks “how much did you make?” A franchise tax asks “are you registered here?” If the answer is yes, you owe — at a profit, at a loss, or dormant. This is the part that blindsides founders. You can have an LLC that earned nothing all year and still get a bill, because the bill isn’t about earnings. It’s about being on the books.
States that charge it usually base the amount on one of three things: a flat fee (you pay the same number no matter what), your revenue or gross receipts, or your capital and assets. A few use a hybrid. The base determines whether the tax is a rounding error or a real line item.
How wildly it varies by state
This is where you have to know your specific state, because the range runs from zero to thousands.
| Franchise tax | How it works | |
|---|---|---|
| California 🇺🇸 | $800 minimum/yr | Flat minimum, more above $250k revenue |
| Delaware 🇺🇸 | $300 flat/yr | Flat annual tax for LLCs |
| Texas 🇺🇸 | Margin-based | % of margin, no tax due below the threshold |
| Wyoming 🇺🇸 | None | Annual report license fee only |
| New Mexico 🇺🇸 | None | No franchise tax, no annual report |
California is the one that hurts. Its $800 annual franchise tax is a minimum, not a maximum — every LLC registered in California or “doing business” in California owes at least $800 to the Franchise Tax Board every year, on top of any income-based fee above $250,000 in revenue. It applies even at a loss, even with zero activity, even in your first short year in most cases. And “doing business” is broad: you can be on the hook because you live there or manage the company from there, even if you formed the LLC in Wyoming.
Delaware keeps it simple for LLCs: a flat $300 annual franchise tax, due June 1, no income-based component. That predictability is part of why Delaware is popular — see Delaware vs Wyoming for the fuller trade-off.
Texas runs a margin-based franchise tax, but with a generous no-tax-due threshold. Below a revenue floor (in the hundreds of thousands), you owe $0 in tax — though historically you still had to acknowledge it via a report. Above it, you pay a small percentage of your margin.
Wyoming and New Mexico charge no franchise tax at all. Wyoming has a small annual report license fee tied to in-state assets; New Mexico requires neither a franchise tax nor an annual report for LLCs, which is why it shows up in the low-maintenance state comparisons.
The classic mistake: form in Wyoming to avoid California’s $800, then run the company from your apartment in Los Angeles. California taxes where you do business, not just where you incorporated. If you operate from California, you likely owe the $800 anyway — plus you’re now paying Wyoming’s fees on top. Form where you actually operate, or know you’re paying twice.
Who owes it, and when
You owe franchise tax in any state where you’re registered or doing business that charges one. That can be more than one state at a time — your formation state plus any state where you’ve registered as a foreign LLC to operate. Each charges on its own schedule.
Timing is set per state and usually doesn’t move with your tax year. Delaware’s flat tax is due June 1. California’s $800 has its own due dates (an initial payment and an annual one tied to your filing). Texas reports key off a May date. Because these are fixed calendar dates rather than anniversary dates, they’re easy to miss if you’re only watching your formation month.
Penalties, and why it’s not your annual report
Miss a franchise tax payment and the state stacks penalties and interest, then moves your LLC out of good standing toward administrative dissolution — the same escalation that follows a missed annual report. California is especially persistent: unpaid $800 charges accrue year over year, and the FTB keeps chasing them even after you’ve stopped using the company, which is why properly dissolving an LLC you’re done with matters — the tax doesn’t stop just because you walked away.
One more distinction that trips people up: franchise tax is not the same as your annual report fee. The annual report is an informational filing — you confirm your address, agent, and members. The franchise tax is a payment. Some states bundle them into one transaction; many keep them separate with different due dates. Treat them as two obligations, because missing either one threatens your good standing on its own. For the full picture of what keeps your company alive, see how to keep an LLC in good standing.
The practical move is to know, before you form, exactly what your chosen state charges and when — and if you operate somewhere different from where you formed, to count both. We track these dates from your filing and flag the franchise-tax states before the bill arrives, so the $800 surprise never is one.
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