Corporate franchise taxes are an important part of a company's compliance requirements. Franchise taxes come under many names (business privilege tax, business franchise tax, business license tax, etc.) and vary widely in how they are calculated. The amount a company owes is typically based on one or more of the following factors:
- Net Worth: The value of the company's assets or capital stock.
- Share Capital: The number of authorized shares or total share value. This could be the Authorized Shares Method or Assumed Par Value Capital Method. For example,Delaware charges franchise tax based on two methods - the number of authorized shares, and the assumed par value capital method - allowing companies to choose the one that results in the lowest tax liability.
- Margin or Gross receipts: Some states use revenue or margin (revenue after deductions such as cost of goods sold or compensation)as part of the calculation.
- Fixed Fees: A flat fee regardless of size or structure.
In addition, franchise taxes can be subject to minimums, maximums, or comparisons to multiple methods, and can vary for C Corporations, S Corporations, LLCs, LPs, and other business structures. A company incorporated in one state but doing business in others may face multiple tax liabilities based on foreign qualification requirements, and failure to meet annual reporting requirements can lead to penalties or the revocation of good standing. As always, be aware of franchise tax requirements when incorporating or expanding your business, and work with qualified lawyers and tax professionals to ensure your compliance requirements fit your business model and goals.
Discern has detailed guides on franchise taxes for many states.