Which states charge a franchise tax on LLCs and how do the rates compare?

A franchise tax is a tax imposed by a state for the privilege of doing business or existing as a legal entity within that state. Despite the name, it has nothing to do with franchise businesses. It is sometimes called a privilege tax, entity tax, or annual tax.

Franchise taxes can be structured as: - Flat annual fees (Delaware's $400 for LLCs, 2026) - Revenue-based taxes (Texas' margin tax) - Asset-based taxes (some states use net worth) - Hybrid structures (combining multiple factors)

Not all states impose franchise taxes on LLCs. Many states only impose franchise taxes on corporations.

California: $800 flat annual franchise tax on all LLCs, plus additional fee based on CA-source income ($900-$11,790 if income exceeds $250,000)

Delaware: $400 flat annual tax on all LLCs (raised from $300 effective 2026)

Texas: Margin (franchise) tax based on revenue. For 2026–27 reports, no tax is due at or below $2.65 million in revenue, but the applicable PIR/OIR is still due May 15. Rate is 0.375% (retail) or 0.75% (other) on taxable margin above the threshold.

Illinois: 1.5% replacement tax on Illinois net income (functions like a franchise tax for pass-through entities)

Tennessee: $300 minimum franchise tax based on net worth apportioned to Tennessee ($0.25 per $100 of net worth, minimum $300)

New York: Annual LLC filing fee ($25-$4,500) based on NY-source gross income

Many states do not impose any franchise tax on LLCs:

- Wyoming: No franchise tax. Only a $60 annual report fee. - New Mexico: No franchise tax. No annual report required. - Florida: No franchise tax for disregarded entity LLCs. Only $138.75 annual report. - Nevada: No franchise tax, but $200 business license + $150 annual list = $350/year. - Colorado: No franchise tax. Only $10 annual report. - Montana: No franchise tax. $20 annual report. - Oregon: No franchise tax on LLCs (the CAT is separate and has a $1M threshold).

For foreign-owned LLCs, states without franchise taxes offer the simplest and cheapest annual compliance.

Franchise taxes should be a significant factor in choosing your formation state. The annual cost difference between California ($800+) and Wyoming ($60) or New Mexico ($0) adds up substantially over the life of the LLC.

Over 10 years: - California: $8,000+ in franchise tax alone - Delaware: $3,000 in franchise tax - Wyoming: $600 in annual report fees - New Mexico: $0 in state fees

Unless you have a specific business reason to form in a state with a franchise tax (like needing Delaware's Court of Chancery or having California operations), choose a state without one.

Remember: franchise taxes are owed to your state of formation. If you form in Wyoming but sell to California customers, you owe Wyoming's $60 annual report (not a franchise tax) to Wyoming, and potentially California income tax on CA-source income to California. But you would NOT owe California's $800 franchise tax unless your LLC is registered in California.