For business owners, taxes can be a major headache. If your eyes are sore from reading through page after page of jargon-filled tax documents, I feel your pain.<\/p>\n\n\n\n
As a franchise owner, you\u2019ll need to understand your tax requirements. In order to operate within a certain region or city, many states require franchises to pay an additional tax.<\/p>\n\n\n\n
But what is franchise tax? And how do you know your tax implications as a franchise owner?
In this article, I\u2019ll break down franchise tax, wading through the jargon to make things as simple as possible.<\/p>\n\n\n\n
A \u201cfranchise tax\u201d is a type of state tax levied on companies that allow them to conduct business in that state. It\u2019s a legal requirement<\/a> sometimes called a \u201cfranchise fee\u201d or a \u201cprivilege tax\u201d. You\u2019re basically paying for the right to operate in the region.<\/p>\n\n\n\n Don\u2019t let the name fool you: These taxes actually have nothing to do with franchising a business or collecting franchisee fees. They are simply fees that you\u2019ll need to pay if you choose to operate in a state with the requirement.<\/p>\n\n\n\n In fact, even companies that are not franchises might owe this tax if they\u2019re operating in certain states<\/a>.<\/p>\n\n\n\n Unlike most other types of personal or corporate taxes, franchise tax is rarely based on profits. It\u2019s owed even if your franchise isn\u2019t making any money (frustrating, I know). If your business meets the right criteria, usually being registered in or having nexus in that state, then you\u2019ll owe the tax.<\/p>\n\n\n\n It\u2019s helpful to think of this as a licensing fee rather than a standard tax payment. And you\u2019ll have to pay this fee for each new state that you open franchise locations in (if the state requires it).<\/p>\n\n\n\n Tax nexus is a situation when a business has a close enough connection with a state that it\u2019s liable to pay tax there. Your franchise can get nexus in a state by conducting business activities, such as:<\/p>\n\n\n\n If you meet one or more of the above criteria, it doesn\u2019t automatically mean you have tax nexus, as it depends on your specific case. But if the state\u2019s tax agency determines that you have, then you\u2019ll likely have to pay franchise taxes.<\/p>\n\n\n\n You may owe franchise tax to a state even if your company isn\u2019t incorporated there. For example, if you form your franchise in New York and open a branch in Texas, you\u2019ll likely owe franchise tax in Texas<\/a>.<\/p>\n\n\n A clear, step-by-step breakdown to help you decide if franchising is right for you\u2014and how to get started.<\/p>\n\n\n\n\t\t\t Chances are that you have at least a basic understanding of how your individual income taxes work. But franchise tax is an entirely different ball game.<\/p>\n\n\n\n Income tax is based on how much money your business earns. The federal government and most states charge income tax on the profit of your business\/franchise.<\/p>\n\n\n\n On the other hand, some states calculate franchise tax as a flat\/fixed fee or base it on other factors like your assets or revenue, but it\u2019s not based directly on your company\u2019s net income.<\/p>\n\n\n\n A franchise owner in a state with franchise tax will be paying two separate taxes every year: income tax on their profits, and franchise tax just for the privilege of doing business there.<\/p>\n\n\n\n Imagine you\u2019ve just opened up a new branch of a fast food franchise in Louisiana. You don\u2019t make a profit there that year, so you don\u2019t owe income tax to the state. But since Louisiana charges a franchise tax<\/a> (based on your company\u2019s capital), you\u2019ll still have to pay that. <\/p>\n\n\n\n If your company\u2019s total capital is under $300,000, you\u2019ll only have to pay the minimum fee of $110. If capital exceeds $300,000, you\u2019ll be taxed $2.75 for each $1,000 over the threshold. Therefore, if your total capital is $500,000, you\u2019ll be taxed for the $200,000 that exceeds the $300,000 threshold and owe $550 on top of the initial $110 fee.<\/p>\n\n\n\n Many companies incorporate in Delaware because its laws are pretty friendly to businesses. While Delaware levies a franchise tax on companies incorporated there, it doesn\u2019t tax the income that the corporation earns outside the state. So basically, a corporation could be incorporated in Delaware, pay Delaware\u2019s franchise tax<\/a> each year, and yet owe no income tax at all if its business is being conducted in other states.<\/p>\n\n\n\n Note<\/strong>: You might still owe income tax in whatever states you actually are operating in (and potentially franchise tax in those other states, if your business has nexus there).<\/p>\n\n\n Sign up for our free email newsletter. It’s a 5-minute read once a week to help you level up on the franchising industry.<\/p>\n\n\n\nWhat Counts as Tax Nexus in a State?<\/h3>\n\n\n\n
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Download the First-Time Franchisee Guide<\/h4>\n\n\n\n
Franchise Tax vs. Income Tax: What\u2019s the Difference?<\/h2>\n\n\n\n
Example #1: Louisiana<\/h3>\n\n\n\n
Example #2: Delaware<\/h3>\n\n\n\n
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