What Is a Franchise Tax?

Plain-language definition. Grounded in dedicated primary-source research across all 51 jurisdictions' statutes and agency guidance (14 confirmed; 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 distinct from an ordinary net-income tax: the qualifying charge may be computed on shares, capital, net worth, gross receipts, or a flat amount. It is also distinct from the Secretary-of-State annual report fee, which is a separate Secretary-of-State filing. Under the default-LLC-inclusive definition used here, 14 of the 51 U.S. jurisdictions have a qualifying obligation alongside (or in place of) the recurring report — the shapes vary more than the count suggests (see below).

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, where tax years beginning after 2023 exempt minimum-only taxpayers whose calculated tax is $100 or less from both the tax and the return, and Texas's annual franchise tax with the Comptroller.

The shapes a franchise tax takes

The 14 confirmed jurisdictions — Alabama, California, Delaware, Kentucky, Minnesota, Nevada, New York, Ohio, Oregon, Rhode Island, Tennessee, Texas, Vermont, and Washington — aren't all classic “franchise tax”-named charges: New York calls its LLC charge an annual filing fee, Ohio and Oregon each call theirs an Activity Tax, 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, gross receipts, or a flat/minimum privilege fee, generally administered by the revenue agency rather than the filing office, with Delaware as the current filing-office-administered exception. The gross-receipts group — Kentucky's LLET, Minnesota's minimum fee, Nevada's Commerce Tax, New York's annual LLC filing fee, Ohio's and Oregon's Activity Taxes, Washington's B&O tax — includes charges keyed to gross receipts, gross profits, property/payroll/sales, or business classification rather than net income. Texas's own margin-based franchise tax already passes that basis test; treating the other seven differently would have been the inconsistent call. The roster follows the qualifying charge for an ordinary LLC, not every state's corporate tax. Connecticut, Massachusetts, Mississippi, New Mexico, North Carolina, and South Carolina have qualifying corporate-only charges, but their ordinary non-electing LLCs owe none of those charges. New Jersey has a gross-receipts-tiered corporate minimum, but its ordinary non-electing LLC likewise owes no Corporation Business Tax minimum. Its separate owner-count-based partnership filing fee does not meet this roster's tax-base test. 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 (Laws 2023, 1st Ex. Sess., c. 26). The 14 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.
Gross receipts or multi-factor apportionment — Kentucky's LLET (lesser of two gross-receipts/gross-profits computations, $175 minimum), Minnesota's minimum fee (bracketed by in-state property, payroll, and sales; $0 for a single-member LLC), Nevada's Commerce Tax ($4M revenue threshold, rate varies by industry), New York's annual LLC filing fee ($25 for a disregarded LLC with New York-source income, gain, loss, or deduction; $25–$4,500 for a partnership-classified LLC, graded by prior-year New York-source gross income), Ohio's CAT (0.26% of taxable gross receipts above its exclusion, with no minimum tax) and Oregon's CAT ($250 plus 0.57% of commercial activity above $1M), Vermont's corporate leg (a 5-tier minimum, $100 to $100,000 by gross receipts, owed only when it beats the ordinary income tax — a second, separate mechanism from the flat $250 Vermont charges LLCs), and Washington's B&O tax (50-plus rate classifications by activity) — none look like a traditional net-worth tax, and most are owed regardless of profit.
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. The seven corporate-only states described above do not enter this roster merely because they tax corporations; a non-electing LLC owes none of those corporate charges. The confirmed LLC-inclusive states are Alabama (Business Privilege Tax on taxable net worth; taxpayers whose calculated tax is $100 or less and who would owe only the minimum are exempt from both the tax and return for tax years beginning after 2023), California ($800 minimum, applies regardless of the $20 Statement of Information), Delaware (a flat $400 annual tax with no report at all), Kentucky (the LLET's lesser-of gross-receipts/gross-profits computation, $175 minimum, identical to the corporate treatment), Minnesota (the minimum fee reaches a multi-member LLC taxed as a partnership once its Minnesota property, payroll, and sales cross the bracket threshold — a single-member LLC owes nothing), Nevada (the Commerce Tax's $4M revenue threshold applies the same way to LLCs and corporations), New York ($25 for a disregarded LLC with New York-source items, or $25–$4,500 for a partnership-classified LLC graded by prior-year New York-source gross income), Ohio and Oregon (their Activity Taxes make no LLC/corporation distinction 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), Tennessee (net worth, $100 minimum, no distinction from the corporate treatment), Texas (an annual franchise-tax report, $0 due for most small entities), Vermont (a flat $250 annual tax for LLCs taxed as partnerships, likewise independent of income), and Washington (the B&O tax's activity-based classifications apply identically regardless of entity type). 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.

Frequently asked questions

Is a franchise tax the same as an annual report fee?

No. The report is a Secretary-of-State (or equivalent) filing that keeps the entity in good standing; the franchise tax is a tax on the privilege of existing as an entity, usually administered by the revenue agency. Under this page's default-LLC-inclusive definition, 14 of the 51 jurisdictions have a qualifying obligation, including seven — Kentucky, Minnesota, Nevada, New York, Ohio, Oregon, Washington — that use a gross-receipts or multi-factor basis rather than the more familiar net-worth or capital charge.

Do I owe franchise tax even if my company made no money?

In the states that impose one, generally yes — franchise taxes are computed on shares, capital, or net worth rather than income, and several states publish minimums that apply regardless of profit (California's minimum is $800; Delaware's share-based corporate tax has a $175-or-$400 minimum depending on calculation method; Tennessee's net-worth-based franchise tax has a $100 minimum).

Does a franchise tax have anything to do with owning a franchise?

No. The word refers to the historical 'franchise' — the state-granted privilege of existing as a legal entity — not to franchised businesses like fast-food chains. A single-member LLC with no franchising activity can still owe a franchise tax.

Do LLCs pay franchise taxes too?

In most states, no — for LLCs the franchise-tax overlay is the exception. Connecticut, Massachusetts, Mississippi, New Jersey, New Mexico, North Carolina, and South Carolina have qualifying corporate charges, but an ordinary LLC that has not elected corporate tax treatment does not owe those charges; they are outside this page's default-LLC-inclusive roster. The 14 confirmed states are Alabama (Business Privilege Tax, subject to its minimum-only exemption), California ($800 minimum), Delaware ($400 flat annual tax for LLCs), Kentucky ($175 minimum LLET), Minnesota (a minimum fee for qualifying multi-member LLCs), Nevada (Commerce Tax above its $4M threshold), New York ($25 for a disregarded LLC with New York-source items, or $25–$4,500 for a partnership-classified LLC based on prior-year New York-source gross income), Ohio and Oregon (Activity Taxes), Rhode Island ($400 flat annual charge), Tennessee ($100 minimum), Texas (franchise-tax report, usually $0 due for small entities), Vermont ($250 flat annual tax for partnership-taxed LLCs), and Washington (activity-classified B&O tax).