Many states require enterprises to pay the franchise tax if they are going to do business in that state. This tax essentially allows them to operate in the state legally.
It is important to note that, despite the name, franchise taxes are not taxes on franchises. Partnerships, corporations, and LLCs are generally required to pay this tax if it is a state requirement. Businesses have to pay corporate income taxes
each year, which are figured based on the business’s net profit. A company that didn’t make a profit in a year thu has no corporate income tax liability. Franchise taxes, on the other hand, are not figured based on net income. Companies must pay these taxes whether or not they made a profit.
Some states have a graduated rate for franchise taxes
, and some have a flat rate that eligible businesses pay. The graduated rate will account for factors like the size of the company and net income. Location is always an important factor since state laws vary, so ask a tax attorney about your situation.