What Is a Franchise Tax?

Plain-language definition. Grounded in dedicated primary-source research across all 51 jurisdictions' revenue-agency statutes (13 confirmed, 7 still under review; not yet published as its own matrix page) and the foreign-LLC renewal and annual-report explainers. Not legal advice.

Short answer

A franchise tax is a state tax on the privilege of existing or doing business as a legal entity in that state. It is not an income tax — it is typically computed on shares, capital, or net worth rather than profit — and it is not the annual report fee, which is a separate Secretary-of-State filing. At least 13 of the 51 U.S. jurisdictions layer a franchise-tax obligation on top of (or in place of) the recurring report; 7 more are still under review (see below) and aren't counted either way yet.

Franchise tax vs. the annual report

States keep the two obligations separate, so the matrices do too. The report keeps the entity in good standing with the filing office; the franchise tax is usually administered by the revenue agency and is often the larger number. California is the canonical example: a $25 corporate statement, and a minimum $800 franchise tax. Reading the report-fee column alone makes exactly the states with the highest carrying cost look cheap — the load-bearing distinction in the corporation renewal explainer. Two states show the inverse: Alabama and Texas require no recurring Secretary-of-State corporation report at all, and run the recurring obligation entirely through the tax agency — Alabama's net-worth-based Business Privilege Tax (minimum reduced to $50, from $100, for tax years beginning after 2022) and Texas's annual franchise tax with the Comptroller.

The shapes a franchise tax takes

The 13 confirmed jurisdictions — Alabama, California, Connecticut, Delaware, Massachusetts, Mississippi, New Mexico, North Carolina, Rhode Island, South Carolina, Tennessee, Texas, and Vermont — aren't all classic “franchise tax”-named charges: Massachusetts calls its version a Corporate Excise, South Carolina a Corporation License Fee, and several others sit inside the state's general business-tax statute rather than a standalone franchise-tax chapter. What unifies them here is the basis, not the name: net worth, capital, authorized shares, or a flat/minimum privilege fee, always administered by the revenue agency rather than the filing office. Seven more states (Kentucky, Minnesota, Nevada, New Jersey, Ohio, Oregon, Washington) charge a gross-receipts or multi-factor-apportionment tax that doesn't cleanly fit that basis test — still under review, not counted here either way until that resolves. Two states dropped off the confirmed list on a currency check: Louisiana's corporation franchise tax is repealed for periods beginning on or after January 1, 2026 (Act 6 of the 2024 Third Extraordinary Session), and Oklahoma's ended after tax year 2023 (HB 1039). Arkansas is excluded on a narrower basis — its annual franchise tax is Secretary-of-State-administered rather than revenue-agency-administered, so it doesn't meet this list's tax-agency test despite the name. The 13 confirmed overlays compute differently:

• Flat or share-based — Delaware's corporate tax is share-based with a minimum of $175 (Authorized Shares method) or $400 (Assumed Par Value Capital method), and a flat $400 annual tax for LLCs in lieu of any report; Rhode Island charges LLCs that haven't elected corporate treatment a flat $400 with no income computation behind it; Vermont charges those LLCs a flat $250; Tennessee's $100 minimum applies identically to corporations and LLCs.
• Minimum tax under an income tax (corporations only in these three — an LLC that hasn't elected corporate treatment owes nothing) — Massachusetts adds a net-worth-or-property component on top of its 8% income tax, or a $456 flat minimum if higher; Connecticut's Capital Base Tax (a declining 0.21% rate) sets a $250 floor under its 7.5% income tax; North Carolina is now net-worth-only, $1.50 per $1,000 capped at $500 for the first $1M, $200 minimum.
• Flat privilege fee, independent of income (corporations only) — New Mexico charges a flat $50/year regardless of income or activity level; South Carolina's License Fee is $15 plus 0.1% of capital ($25 minimum), layered on top of its separate 5% income tax rather than acting as a floor under it.
• Capital-based, phasing out — Mississippi taxes capital in excess of $100,000 (corporations and C-corp-electing LLCs only): $0.50 per $1,000 for tax year 2026, $0.25 for 2027, repealed from 2028.
• Tax-agency reports — California's LLC/corporate minimum is $800 either way; Texas administers an annual franchise-tax report through the Comptroller (due May 15), paired with a Public Information Report — the report itself carries no filing fee, and most small entities owe no tax; Alabama runs its entire recurring obligation through this Business Privilege Tax rather than a Secretary-of-State report.

Where LLCs meet franchise taxes

For LLCs, the overlay is the exception rather than the rule — and narrower than the corporate list above, since several states that tax corporations this way (Connecticut, Massachusetts, Mississippi's default case, New Mexico, North Carolina, South Carolina) exclude an ordinary LLC entirely unless it elects corporate tax treatment. The confirmed LLC-inclusive states are California ($800 minimum, applies regardless of the $20 Statement of Information), Delaware (a flat $400 annual tax with no report at all), Rhode Island (a flat $400 annual charge for LLCs that haven't elected corporate treatment — the same dollar figure as the corporate minimum, but a genuinely different, income-independent mechanism), Vermont (a flat $250 annual tax for LLCs taxed as partnerships, likewise independent of income), Tennessee (net worth, $100 minimum, no distinction from the corporate treatment), and Texas (an annual franchise-tax report, $0 due for most small entities). Arkansas is a common point of confusion: it does charge LLCs an annual franchise tax, but that charge is Secretary-of-State-administered rather than revenue-agency-administered, so it falls outside this page's tax-agency definition even though the name matches. The per-state picture for foreign-registered LLCs is in the foreign LLC annual report rules explainer.

A franchise tax has nothing to do with franchising

The “franchise” is the historical legal term for the state-granted privilege of existing as an entity — not a franchised business format. An entity that has never sold or bought a franchise can owe franchise tax, and a franchisee's obligations to its franchisor are a private contract the state's franchise tax does not touch.

Not legal advice

Whether a given entity owes a franchise tax, on what base, and with what minimum is state-specific and changes on legislative cycles. Confirm against the state revenue agency's published schedule before relying on a figure.

See also: Corporation Annual Report & Renewal Rules (matrix) · What is an annual report? · Foreign LLC Renewal Fees by State — Explainer