Once you start a business, it seems like every time you turn around, you’re getting another notice to renew a license or pay a business tax. It’s hard to know what they’re all for, but keeping them straight is a necessity if you want to stay compliant with your business.
In the coming months, I’ll be writing about some of these licenses, permits, and taxes to help you demystify the world of small business ownership. This month, let’s look at franchise taxes.
First of All, What IS a Franchise Tax?
In a nutshell, a franchise tax is one the state you incorporated your business in charges you for the privilege of running your business in that state. Every state has a different fee structure; some, like California, have a flat minimum rate plus a percentage of net income (for California, that’s a minimum of $800, and 1.5% of income). Others have just a flat rate or percentage of net income or net worth.
Sometimes, LLCs and Limited Partnerships have to pay the franchise tax, in addition to specific types of corporations, like the S Corp.
Some states, like California, may waive your first year’s franchise tax fee, but check to see if you qualify before you assume you don’t have to pay.
So, Does It Have to Do with Franchises? Because my Business Isn’t a Franchise
I know it’s misleading, but no, a franchise tax has nothing to do with a franchised business (although because they’re corporations, they do have to pay the franchise tax). So even if your business isn’t a franchise, you are responsible for paying your franchise tax each year.
Does Every State Charge a Franchise Tax?
No. Some states, like Nevada, do not charge a franchise tax. That’s why many people consider incorporating a business in a state like Nevada. (Although we at CorpNet recommend you incorporate in the state where you do business.)
What Happens if I Don’t Pay my Franchise Tax on Time?
You’ll likely be hit with a penalty fee, depending on your state policy. Check your state’s Franchise Tax website to find out. Also keep in mind that franchise taxes aren’t necessarily due on our traditional tax day in April, nor at the end of the year. Find out when your state’s deadline is and make plans to set aside enough money to pay your tax before then.
By understanding what franchise tax is for and knowing when your business needs to pay your fees, you can stay compliant with your state and remain in good standing.