Not all, but some states require business entities to file an annual report and pay a franchise tax each year. While the name suggests that a franchise tax report might only apply to businesses that are franchises, that’s not the case!
A franchise tax is a fee that companies pay for the privilege of being registered or organized in the state. As a registered business entity, a company gains personal liability protection for its owners, certain tax deductions, business name protection, and possibly other benefits. In exchange for this protection, the state serves a tax and it is managed via the annual franchise tax report.
Franchise Tax Fees
Filing fees, franchise tax rates, and how states calculate what a limited liability company (LLC), corporation, limited partnership, or other entity will owe vary by state.
Possible Franchise Tax Calculation Methods
- Business income
- Value of company assets
- Outstanding corporate stock shares and their par value
- Flat fee regardless of the above
Some states apply a combination of these elements when determining tax owed. Also, some states have minimum amounts due.
Franchise tax thresholds, rates, and deduction limits may vary from one report year to the next, so it’s important that business owners review requirements carefully every year.
Annual Report Deadlines
Typically, a company’s annual report and franchise tax are due at the same time. Most states set due dates that coincide with the entity’s anniversary date (the month and day of formation or incorporation). For example, if a business owner formed an LLC on June 17, the annual report and tax would be due by June 17 each year.
Other states have a set deadline for all companies. For example, Texas annual franchise tax reports are due by May 15. Some states have set due dates, but they are different for different entity types. For example, corporations must submit their Delaware franchise tax and annual report by March 1 and LLCs (alternative entity tax) by June 1.
When due dates fall on a weekend or holiday, states will usually consider the next business day as the deadline.
Related Reading: Annual Report List by State for LLCs and Corporations
Information Requested in an Annual Franchise Tax Report
Just as the fees and deadlines vary by state, so may some of the information requested on annual report forms. Generally, business owners can expect to provide some of the following details.
- Taxpayer number
- Taxpayer name and mailing address
- Secretary of State file number or Comptroller file number
- Principal office
- Principal place of business
- Names, titles, term dates, and mailing addresses of the officers, directors, members, general partners, or managers of the entity
- The LLC’s management structure (i.e., member or manager)
- Owned entities information (if the entity owns an interest in any subsidiaries)
- Information about any parent entities that own interest in the filing entity
- Registered agent information
How to File Annual Reports and Pay Franchise Tax
Most states prefer that business owners file their reports and pay their tax electronically through the state government’s secure web portal (a processing fee might be charged for the transaction). If the tax due reaches a certain threshold amount, some states may require electronic filing. Alternatively, states usually accept printed reports, which business owners should mail or fax to a designated address or fax number.
Mishaps and Mistakes to Avoid
As with all state business compliance obligations, companies risk penalties and fees if they ignore or forget to file their franchise tax reports. Also, even though the reports are relatively straightforward, errors or missing information can lead to delays, late fees, interest charges, and possibly loss of the business’s good standing status.
In some states, the longer the delay in reporting and paying franchise tax the more the business must pay in penalties and interest. For example, Texas issues a 10 percent penalty on top of an initial $50 late fee if tax is paid after 30 days past the due date. And the state charges interest on taxes that are over 60 days past the due date.
Keep Track of Your Compliance Tasks
Why is it so critical to stay in step with compliance? Because if your business fails to meet its state’s rules, you could lose your personal liability protection, putting your home, retirement savings, and other assets at risk. Also, your company will likely incur additional costs that could hurt its profitability and cash flow. There’s also the possibility the state might suspend or terminate your business entity, taking away its authority to provide your products and services.
As you can see, paying attention to compliance obligations can mean the difference between business failure and success! It can be helpful to ask an attorney or tax advisor (or both!) for guidance as you determine your responsibilities and when you must follow through on them. And remember, CorpNet is here to help you stay current on all your annual franchise tax reports and other startup and compliance requirements.
From LLC formation to C Corp incorporation to S Corporation election, EIN applications to payroll tax registration, initial reports to annual reports, and much, much more, we’ve worked with tens of thousands of entrepreneurs across the country. No matter which of the 50 states your business operates, we have the expertise and systems in place to complete and submit your all-important business filings.
Contact us today to alleviate stress, gain peace of mind, and ultimately save money as we save you time!