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What is a Franchise Tax?

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  • Written By: Erika Peterson
  • Edited By: Bronwyn Harris
  • Last Modified Date: 21 September 2016
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A franchise tax is a type of state tax that is obligatory of some business owners. It is required to be paid by certain types of corporations by its governing state’s tax board. Franchise tax amounts vary according to the size of a business, but other elements of a company can be used to figure out the tax fee as well.

Net worth and net income both attribute to a corporation’s franchise tax. Profit, income, assets, and outstanding shares may also determine a business’s fee. A state may also use a combination of any of those factors to decide a company’s tax fee. Of course, the tax amount varies and it is determined differently from state to state. In some states the franchise tax is a flat fee.

The basic idea behind the franchise tax is that it is a fee for the privilege of conducting business in a certain state. It actually gives the corporation the legal right to operate in a certain area. Such a fee is usually paid annually, and it can be paid during the normal tax time. Some corporations have to pay multiple franchise taxes, one to the state in which they call home and other taxes to states in which the company operates and conducts business.

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While taxes are a must for all businesses and individuals, not every business has to pay a franchise tax fee. In fact, some companies are partially or fully exempt from the tax. These companies vary from state to state, but some of the most common types of businesses that seem to be exempt or partially exempt are non-profit organizations, fraternal organizations, and some insurance companies and limited liability corporations or LLCs.

It is important that each and every business check out the requirements for franchise tax in their particular state and the states in which they conduct business. While an accountant may determine a correct franchise tax fee, there may also be other requirements that need to be met. One of the most common is a report that needs to be filed directly with a certain part of the state’s government.

In the United States, almost every state has a specific section or department that is dedicated to collecting and explaining the franchises tax fee. These are the right places to go for other informational needs as well. They also offer access to forms, franchise tax information and general tax information. In California, this taxing agency is called the Franchise Tax Board, but in other states franchise taxes are handled by the state controller’s office or other governmental entities.

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