How Business Pay Franchise Taxes?

There are many kinds of taxes imposed by the states like the corporation tax, sales tax, etc. These taxes have different names, and hence, it leads to confusion. Franchise Tax also falls under these categories, but there are lots of confusion and misunderstanding regarding this tax. So what is Franchise Tax?

State charges the businesses for the benefits and advantage of subsuming for doing business in that particular state. This is called the Franchise tax and just like the income tax, they are charged annually. This tax is a must for all the business, as failure to pay may lead to disqualification of doing business in that state.

All kinds of businesses are required to register their business in the state like the LLC’s, Partnerships and corporations, but the sole proprietorships are exempted from this tax as they are not formally registered to do business in the state.

The Franchise tax is imposed on the companies that are available to do business. A business may spread its wings to other states, but it does not mean that they have to pay taxes in all the other states. The tax is not on franchises but the business. For example, McDonald is spread to many parts of the state. So, it cannot be taxed on all the McDonald Franchise. The tax is for the business running and not for the outlets.

A company may do business in several states, and mostly they must have formally registered in all the states. If the business is registered in several states, then they are supposed to pay Franchise Tax on all the registered states. A business may gain profit or face loss. No matter what place your business takes, one is not exempted of Franchise Tax. Tax Returns Filing is a benefit for all the business and is recommended to file it.

The Ultimate Tax Return Filing Guide

Franchise Taxes vs. Business Income Taxes
All the businesses pay income taxes, but the corporations pay the tax directly. The income tax is usually based on the corporation’s profit. The corporations are required to pay both the state income tax and federal income tax if the state demands to pay the Income Tax.

Franchise Tax vs. Biennial Reports or Annual Reports
Annual reports of the businesses are required to be submitted and filed to the state. These reports do not come in freehand and are demanded with a fee. They are supposed to be submitted every year in a few states and every alternate year in few places.

Franchise Taxes vs. Gross Receipts Tax
The Gross Receipts Tax, in other words, is a sales tax. The tax is not on the customer but the seller. This type of tax is just like the franchise tax but works completely in a different method.

Why Franchise Tax Takes a Backseat When it comes to Business?

A Franchise Tax is also known as the Privilege Tax as they are privileged to do business in a particular state. There are few states where it is compulsory to pay both the Franchise Tax and the Income Tax. This, in turn, makes the state cost higher in terms of taxes, and as a result, it drives business out of the state. Check Out – some more insights about why franchise pay taxes.

But few states eliminate the Franchise tax to encourage the people to do and grow business.

Determination of Franchise Tax by the State

The states differ in their criteria as to what type of business must pay the franchise tax, and they are described as the

• Income – the franchise tax is an income tax
• Stock shares, stock par value, capital stock value and the authorized shares
• Gross benefits
• An amount that passes the certain cost of benefits
• Tangible assets or property
• The tax defined by the state
• Gross receipts tax
• Net worth

How to Set Franchise Tax for Business in a Particular State?
Most of the businesses excluding the sole proprietors should register with a corporation, LLC, or partnership. Once you are done with the registration, the state will contact in relation to the business registration.

One must always make sure to check with the state department to ascertain about whether the state runs for the Franchise tax or any other business tax and act accordingly.