State Franchise Tax Obligations for Small Businesses

By Yarik Yarosh, CPA ·September 5, 2026 ·6 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

State franchise taxes are one of the most overlooked obligations for small businesses, particularly those formed in one state but operating in another. Unlike income taxes (which are based on profit), franchise taxes are often based on revenue, net worth, or simply the privilege of existing as a business entity in the state. A business that nets $0 in profit can still owe $800 or more in franchise tax.

✓Key takeaway

Major state franchise tax regimes:

California:

$800 minimum franchise tax for LLCs, S-Corps, C-Corps, and LLPs
Due regardless of income or activity
LLCs also pay an LLC fee based on gross receipts: $900 ($250K-$500K), $2,500 ($500K-$1M), $6,000 ($1M-$5M), $11,790 ($5M+)
First-year exemption for LLCs and C-Corps (not S-Corps) formed after January 1, 2021
Due by the 15th day of the 4th month of the tax year (April 15 for calendar-year entities)

Texas:

No income tax, but imposes a franchise (margin) tax
Rate: 0.375% (retail/wholesale) or 0.75% (other businesses) of the taxable margin
Taxable margin = the lesser of: total revenue, total revenue minus COGS, total revenue minus compensation, or 70% of total revenue
No-tax-due threshold: $2,470,000 in total revenue (businesses below this owe $0)
Even businesses below the threshold must file a franchise tax report (the filing obligation exists even if no tax is owed)

Delaware:

Annual franchise tax based on authorized shares (authorized shares method) or assumed par value capital method
Minimum: $175 (for-profit corporation)
Can be extremely expensive for corporations with large numbers of authorized shares (millions of authorized shares can produce a $200,000+ franchise tax bill)
LLCs: flat $300 annual tax
Due June 1 each year for corporations, June 1 for LLCs
Many startups incorporate in Delaware for legal reasons but are surprised by the franchise tax

New York:

Fixed dollar minimum tax based on receipts ($25-$200,000/year for S-Corps, starting at $25 for receipts under $100K)
Metropolitan transportation surcharge (MTA): additional percentage for NYC-area businesses
Filing fee: $25/year for LLCs

Other notable states:

Illinois: $75 annual report fee (reduced from $150)
Pennsylvania: $0 for S-Corps and LLCs (no franchise tax), but C-Corps pay 8.49% corporate net income tax
Ohio: Commercial Activity Tax (CAT) on gross receipts over $150,000 (0.26%)
Tennessee: $300 minimum franchise tax (based on net worth or tangible property)
Georgia: no franchise tax (replaced by a net worth tax that was repealed)

How do franchise taxes affect entity and state selection?

Hypothetical example

Round numbers. For current guidance, see IRS state government websites. A consulting business formed in Delaware (for legal protections) but operating entirely in Florida. Revenue: $200,000. Net profit: $120,000. No employees in Delaware.

Delaware costs:

Franchise tax (LLC): $300/year
Registered agent in Delaware: $100-$300/year
Annual report filing fee: $0 for LLCs
Total Delaware costs: $400-$600/year

Florida costs:

Foreign LLC registration (Delaware LLC doing business in FL): $125 initial, $138.75/year
No state income tax
Total Florida costs: $138.75/year

Total annual cost of Delaware + Florida structure: $538.75-$738.75/year

If formed in Florida instead:

Florida LLC formation: $125 initial, $138.75/year
No Delaware franchise tax
No registered agent fee in Delaware
Total: $138.75/year

Savings from forming in Florida: $400-$600/year

For a small consulting business with no investors, no plans for venture funding, and no need for Delaware chancery court, forming in the home state (Florida) is almost always the correct choice. Delaware formation is typically justified only when:

The business plans to raise venture capital (VCs expect Delaware incorporation)
The business has complex governance needs (Delaware law is more developed)
The business has multiple owners who want the protections of Delaware’s LLC statute

California trap: If the same business operates in California instead of Florida:

California franchise tax: $800/year (minimum, regardless of income)
If the business is also formed in Delaware: $800 CA + $300 DE = $1,100/year in franchise taxes alone
If formed in California: $800/year
The Delaware formation provides no savings and adds $300/year

Texas scenario: The consulting business moves to Texas. Revenue: $200,000.

Texas margin tax: $0 (below the $2,470,000 no-tax-due threshold)
But the business must still FILE the Texas franchise tax report (failure to file triggers revocation of the business entity)
If the business forgets to file for 3 years: Texas can revoke the LLC or corporation, which means the owner loses liability protection retroactively

Key planning point: The cheapest franchise tax obligation is the one that doesn’t exist. Before forming an entity, check the annual tax and filing obligations in:

The state of formation
The state(s) of operation
Any state where the business has employees, inventory, or an office

Form the entity in the state where the business operates unless there’s a specific legal reason to choose a different state.

Illustrative numbers only, not a real client and not advice for your facts.

What is the difference between franchise tax and income tax?

A franchise tax is a fee for the privilege of doing business in a state, while income tax is based on how much profit the business earns. Some states impose both. Texas has no income tax but imposes a franchise (margin) tax on businesses with revenue above the no-tax-due threshold. California charges an $800 minimum franchise tax on every LLC and corporation regardless of income. Delaware charges franchise tax based on authorized shares or assumed par value. The key distinction: franchise tax can be due even if the business loses money, while income tax applies only to profits.

How do I determine which states require franchise tax filings?

You must file in every state where you are registered to do business (domesticated or foreign-qualified) and in your state of formation. Registration alone triggers the obligation regardless of revenue in that state. Many businesses incorporate in Delaware or Nevada for legal reasons but operate in another state, creating franchise tax obligations in both the formation state and the operating state. Before forming an entity, compare the total annual cost across states, including the franchise tax, annual report fee, and registered agent fee. Forming in a “prestige” state that charges high franchise taxes while operating entirely elsewhere can cost thousands per year with no practical benefit.

Related guides:

Multi-State Tax Obligations for Service Businesses: Nexus, Withholding, and Filing Requirements

How do you handle state tax obligations when your business operates in multiple states?

Multi-state businesses must determine their filing obligations in each state based on nexus (physical presence, economic thresholds, or factor-based), then apportion income using each state’s apportionment formula. Most states use a single-factor sales apportionment formula that assigns income based on where your sales are delivered, though some states still use a three-factor formula weighting sales, payroll, and property. Throwback and throwout rules in some states can increase your tax liability by reassigning sales revenue from states where you aren’t taxable back to your home state. The pass-through entity tax election available in most states allows S corps and partnerships to pay state income tax at the entity level and claim a federal deduction, effectively bypassing the $10,000 SALT deduction cap for owners.

Want this checked against your own situation?

Start with a Diagnostic: a CPA licensed in the US and Canada reads your file and tells you in writing what's wrong and how to fix it, three to four business days after you finish the questions. The report is $250. If you hire us for any work after that, you get the $250 back as a discount on that work. Or send us your return or your letter and get a fixed price, free.

Start a Diagnostic →See prices

Get a fixed price, free

Get the next cross-border guide by email

One or two plain-English guides a week on US-Canada tax. No spam, unsubscribe anytime.

Cite this page

Yarik Yarosh, CPA. "State Franchise Tax Obligations for Small Businesses." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-state-franchise-tax-obligations

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.