Are you a U.S. citizen opening a business? Or perhaps you’re a foreigner opening a business to run in the U.S. There are many rules and regulations regarding taxation depending where you open your business, what the legal entity is, and how you plan to work. State franchise taxes are one of the first payments you’ll make for your new business.
Having to pay local, state, and federal taxes is a common phenomenon owning a business in the U.S. While most states do their best to avoid their business owners from paying more than necessary, some states haven’t fully updated their rules.
Franchise Tax vs Federal Tax
Based on the name it may seem like it’s another form of taxation on your business, but that’s not quite the case. The purpose of Franchise Taxes is to essentially “fee” a legal entity for doing business within their state and/or jurisdiction. However, based on the state, entities such as nonprofits and charities are exempt from paying this tax. While you can use tax treaties on federal taxes, you can’t use them to cover a franchise tax.
Federal taxes are mandatory payments made to the US federal government obtained by the Internal Revenue Service (IRS) based on your income. The purpose of these taxes is to support the benefits and services the government provides to their citizens. This is where you can use tax treaties to avoid being double taxed from your home country and the U.S.
Paying and What Happens
Regardless if your business is actively participating in daily operations or is held on the back burner, you’re required to pay. Just like taxes, if you fail to pay, consequences build up very quickly. Missing your payment can lead to penalties, interest, and losing your “good standing” with the state. Further complications can lead to suspension or dissolution of your business which can affect many other aspects such as contracts, bank accounts, and compliance.
Which States Charge Franchise Tax?
Not every state has a franchise tax. Some charge a flat fee, others base it on your company’s net worth, shares, or gross income. And in certain states, if your revenue is under a specific level, you may not owe anything at all.
- Yes – Franchise Tax Applies: AL, AR, CA, DE, GA, IL, LA (pending repeal), MN, MS, NC, NY, OK, PA, TN, TX, WV
- No – Franchise Tax: All other states (though many still require an annual report or filing fee)
Plan Ahead for Your Business
Franchise taxes aren’t based on profits, so it’s smart to budget for the minimum fee even if your business isn’t making money. Rules differ by entity type, and missing payments can quickly lead to penalties or suspension. For foreign business owners, remember that federal tax treaties don’t apply here, so planning with a tax advisor can save you from surprises.
If you’re a U.S. entrepreneur, make sure you know what your state requires. If you’re a foreigner running a U.S. business, this is one of those areas where local state rules can surprise you. Understanding any fees upfront will help you stay compliant, avoid unnecessary penalties, and make smarter choices about where to establish your business.
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