The Highlights
- Franchise tax is a fee charged by states in exchange for allowing businesses to operate there.
- Franchise taxes can either be flat fees or percentages, depending on the state’s regulations.
- An LLC may have to pay franchise taxes in multiple states based on its home state and business presence.
Today is the best time to launch an entrepreneurial venture in the US, especially as an ecommerce business. However, franchise tax for different business entities is one of those roadblocks that can catch you off guard early on if you’re not careful.
Understand the difference between franchise tax vs. income tax and learn how to calculate franchise tax with this quick RJM Tax Exemption blog, and unlock your ecommerce potential today.
What is Franchise Tax?
Newcomers often hear the term ‘franchise tax’ and think it’s related to fast food chains. Spoiler alert: it really isn’t.
Instead, franchise tax for ecommerce LLCs in the US is more of a fee charged by states to businesses for the privilege of operating within the state. Think of it as an entry or membership fee to a prestigious establishment. This tax applies unilaterally to LLCs doing business in a state, whether they’re selling mittens or vintage apparel.
How It Works
Franchise tax is typically based on where your business is registered and sometimes even in other states if your business has a significant presence there. Depending on the state, the tax itself can be calculated based on:
- Your business’s revenue
- Business net worth
- Capital
- Other financial metrics determined by the state
Franchise tax for ecommerce LLCs in the US varies significantly from one state to the next, but not all states impose this tax. We’ll take a closer look at those state-by-state differences later on.
Who Pays Franchise Tax?
If you’re registered or doing business in a state with a franchise tax as an LLC, you might just be liable to pay the tax, also known as a privilege tax. Franchise tax for different business entities includes:
- Foreign LLCs registered to do business in a state. For example, a business formed in New Jersey doing business in California would still need to pay the franchise tax levied by California.
- In-state LLCs, like a business formed and doing business in Texas, would naturally need to pay the franchise tax for ecommerce LLCs in the US.
- Non-LLC entities like limited partnerships may also be liable to pay franchise taxes depending on state-specific rules.
Franchise Tax vs. Income Tax
It’s easy to mix up tax terms if you’re juggling an ecommerce business on your own instead of working with a top-rated tax consultancy like RJM, but we’ve got you covered.
Income tax is typically calculated based on a company’s profits, while franchise tax is applied regardless of any profit, since it’s tied to your business’s existence in a given state.
Franchise Taxes By State
Franchise tax for ecommerce LLCs in the US depends entirely on the state, from how you calculate franchise tax to how you pay it. While many states, such as Kansas, West Virginia, and Pennsylvania, have eliminated their franchise tax regulations, franchise taxes for different business entities remain active in some states, including Delaware, Texas, and California.
Delaware
Delaware is popularly known as a business-friendly state, but LLCs still need to pay a franchise tax to operate there. Delaware uses two ways of calculating franchise tax for LLCs in the state, one based on the assumed par value capital and the other based on authorized shares. You can choose whichever method leads to lower tax liabilities.
Assumed Par Value Capital Method
If you’re estimating franchise tax for ecommerce LLCs in the US and considering Delaware, the par value method is slightly more complicated. You’ll need to:
- Divide your gross assets by the number of issued shares
- Multiply the result (the assumed par) by the number of authorized shares with a lower par value than the assumed par.
- Total the par value of all authorized shares with a value higher than the assumed par.
- Add that to the number of shares with a lower value.
- Divide the result by $1,000,000 and multiply by $400 to get the final value.
The minimum franchise tax in Delaware is $200, while the maximum franchise tax for ecommerce LLCs in the US for Delaware can go all the way up to $200,000.
Authorized Shares Method
This method of calculating franchise taxes for different business entities is much simpler and about as easy as learning the differences between franchise tax vs. income tax.
Companies with less than 5,000 authorized shares need to pay a minimum franchise tax of $175, while companies with up to 10,000 shares pay $250. Every 10,000 shares after that incurs an additional $85 in franchise tax, with a maximum limit of $200,000.
Texas
Texas is more of an outlier when it comes to franchise tax for ecommerce LLCs in the US. They use a ‘Texas Margin Tax’ system where your payable franchise tax is based on your taxable margin.
The taxable margin applies when your business is above a no tax due threshold of $2,470,000 and is calculated by subtracting allowed deductions, cost of goods sold, or compensation from total revenue.
California
California’s franchise tax is based on your net income and your business structure, with a minimum rate of $800. For example, C corporations need to pay 8.84% of net income, while S corporations pay 1.5%. Partnerships like LLCs pay either a minimum $800 or a percentage of total income if it exceeds a set threshold.
If you’re considering franchise tax for ecommerce LLCs in the US, remember that you will also have to pay California’s state income tax separately from the franchise tax.
Key Considerations for Ecommerce LLCs
With the varying franchise taxes for different business entities, you should keep these considerations in mind when planning how to calculate franchise taxes.
- Multi-State Taxation: Remember that franchise tax doesn’t just apply in your home state. You may have multi-state tax liabilities depending on your economic nexus, which will affect everything from sales tax exemptions to filing.
- Home State Compliance: Franchise tax for ecommerce LLCs in the US applies regardless of physical presence. This means that ecommerce businesses need to pay franchise tax at the point of registration, even if they’re operating completely online.
- Record Keeping: You’ll need to track revenue, assets, and even inventory locations to accurately calculate your tax obligations if you’re not working with a trusted tax consultancy.
Navigate Franchise Tax Like a Pro
Between figuring out the differences between franchise tax vs. income tax, navigating flat franchise tax fees in some states and percentages in others, perfect compliance is a challenge for ecommerce businesses in the US.
RJM Tax Exemption simplifies franchise tax for ecommerce LLCs by doing the heavy lifting for you. Whether you’re selling in one state or nationwide, our tax experts can accurately determine your tax nexus to ensure you stay compliant through changing regulations. Get a free consultation today.
Frequently Asked Questions
Do I need to pay franchise tax even if my business isn’t profitable?
Yes. Franchise taxes for different business entities aren’t tied to profits at all. Depending on the state you’re in, you may be liable to pay franchise tax.
Can my business owe franchise tax in multiple states?
Yes, depending on where your business is registered and its business presence in other states, you may owe franchise tax in multiple states. You can clarify franchise tax obligations for ecommerce LLCs by contacting us.
What happens if I don’t pay my franchise tax?
Missing your franchise tax payment deadlines consistently can lead to mounting penalties and potentially even a loss of your LLC license, prohibiting you from operating in the state.
