Published October 7, 2026
The name is the first lie. Franchise tax has nothing to do with franchises. It is a state tax on the privilege of existing as a business entity, and the defining feature is the one that shocks new owners: you owe it whether or not the business made a single dollar. An LLC that earned $0 last year still gets the bill. California's is $800. Delaware's is $300. Texas calls its version a margin tax and most small LLCs owe nothing, but they still have to file. If you are choosing where to form, or wondering why a state you barely operate in wants money, this is the tax to understand.
What franchise tax actually is
Three things it is not. It is not an income tax: income tax takes a share of profits, franchise tax charges rent on the entity itself. It is not an annual report fee, though states love to blur the two: the report updates your information, the tax buys the privilege. And it is not universal. Only about a dozen states impose a franchise or privilege tax on LLCs. Everyone else funds their Secretary of State with report fees alone.
The names vary by state, which is half the confusion. California calls it the franchise tax. Delaware calls its LLC version an annual tax. Texas calls it the margin tax. Alabama calls it the business privilege tax. Different labels, same concept: pay for the right to be an LLC here.
Which states charge it, and how each one calculates it
States fall into three camps. Flat annual amounts: California charges every LLC an $800 minimum franchise tax per year, plus a gross-receipts fee that climbs as high as $11,790 for larger businesses. Delaware charges LLCs a flat $300, due June 1. Arkansas charges a flat amount as well. Simple to budget, painful to pay on a dormant company.
Revenue-based: Texas is the famous one. Its margin tax runs 0.375% for retail and wholesale or 0.75% for everyone else, but only on revenue above the no-tax-due threshold, which sits at $2.47 million for 2026. That means the overwhelming majority of small LLCs owe Texas exactly $0. The catch is the filing: you still file the report to prove you owe nothing. Skip the filing and the penalties arrive anyway.
Net worth or capital-based: Tennessee, Louisiana, Mississippi, Alabama, Illinois, Georgia, Oklahoma, and North Carolina compute the tax from net worth, capital employed, or a similar balance-sheet measure. These are the hardest to estimate in advance, because the number comes from your books rather than a posted fee schedule. New York is its own case: a $9 biennial filing fee plus the publication requirement, which we covered in the publication cost guide.
The three decision rules
Rule one: multiply by five. If you are choosing between formation states, the franchise tax is the recurring cost that decides the comparison. A $70 filing fee versus a $300 filing fee is noise. Five years of $800 versus five years of $0 is $4,000. Run the five-year total before you fall in love with a state.
Rule two: you cannot dodge it by forming elsewhere. The classic move is forming in Wyoming to escape California's $800. It fails the moment you operate in California, because California taxes entities doing business there regardless of where they were formed. Now you owe California's $800 and Wyoming's fees, plus a foreign qualification filing. The dodge only works if you genuinely do business in the cheap state.
Rule three: a dead LLC still owes it. This is the expensive lesson. Franchise tax applies to active and inactive entities alike, which means the LLC you stopped using two years ago has been quietly accumulating bills and penalties. If you are done with an entity, dissolve it properly with the state. Abandonment is the most expensive way to close a business.
Frequently asked questions
Is franchise tax the same as state income tax?
No. Franchise tax is a tax for the privilege of operating as a business entity in the state, owed whether or not you made a profit. State income tax is levied on net income. Many states charge both, and they are filed separately.
Do I owe franchise tax if my LLC made no money?
In the states that charge it, yes. California's $800 and Delaware's $300 apply to dormant LLCs exactly the same as active ones. The tax buys the privilege of existing as an entity, not a share of your profits.
Which states have no franchise tax for LLCs?
Most states. Only about a dozen impose a franchise or privilege tax on LLCs, including California, Delaware, Texas, Tennessee, New York, Alabama, Arkansas, Louisiana, Mississippi, Illinois, Georgia, Oklahoma, and North Carolina. States like Wyoming, Florida, and Colorado charge annual report fees but no franchise tax.
Can I avoid franchise tax by forming my LLC in another state?
Only if you genuinely do not operate in the taxing state. If you live and work in California but formed in Wyoming, California still expects its $800, plus you now pay Wyoming's fees too. Foreign qualification usually means paying in both states.
Delaware vs Wyoming for LLC franchise tax?
Delaware charges LLCs a flat $300 annual tax due June 1. Wyoming charges a $60 annual report fee and no franchise tax. Delaware's reputation as the cheap state applies to corporations using the authorized-shares method, not to LLCs.
See every state's fees in one table.
LLC Cost by State compares filing fees, annual report fees, and franchise taxes across all 50 states plus DC, with a 5-year total cost calculator.
Not legal advice: Fee schedules change and this summary reflects figures verified in 2026. Always confirm current fees with your Secretary of State before filing.