Franchise Tax and State Annual Report in the USA

Franchise tax is levied by some US states on businesses for the privilege of incorporating and operating in their jurisdiction. It may not exist in the state you are in or are planning to set up your business in. It is generally not levied on income, but on measures such as the net worth or gross assets of the business.

All forms of organisation — corporations, partnerships, LLPs, LPs and LLCs — need to pay franchise tax, except sole proprietorships, which are not registered with the state. Failure to pay can bar the business from operating in that state.

Franchise tax applies to businesses operating in a state's jurisdiction, so a nexus must exist between the business and the state. As with sales tax, nexus is hard to determine: guidelines vary from state to state and from business to business, so professional advice is the reliable way to avoid a future tax dispute.

You might have no customer, no inventory and no physical location in a state and still be subject to its franchise tax because your employees reside there.

The basis differs from state to state. It can be gross assets, net worth, the par value of stock, the value of capital stock, tangible assets, paid-in capital, taxable capital or gross receipts. There are many intricacies, so a solution tailored to your business is better than generic information.

Annual reports are filed with the Secretary of State. They keep the state, the public and investors informed of your business information, which changes over time, and give the state a stable revenue stream.

LLPs, LLCs, LPs and even non-profits may need to file. Requirements and filing costs vary from state to state, it is easy to miss a filing date, and you might still need to file even after your nexus with a state is severed. Failing to file can lead to:

• penalties;
• limited sources of finance, as the business cannot produce a good standing certificate to funding sources;
• losing a bid in a state tender;
• disqualification and possibly dissolution.

The details vary by state and by business type, but annual reports generally ask for:

• the company's legal name;
• the address of its primary office in that state, if any;
• the address of its primary office wherever located in the US;
• the name of the registered agent;
• the address of the registered office;
• the names and business addresses of directors and officers (corporation), managers and members (LLC) or partners (LLP and LP).