What Is a Franchise Tax? Definition and Use

Definition

Franchise Tax - A franchise tax is a recurring state fee charged for the privilege of existing as an LLC or corporation in a state, assessed separately from income tax.

Delaware charges every LLC a flat $300 annual franchise tax, due June 1, regardless of revenue or activity. A Delaware anonymous LLC therefore costs $407 to form and then roughly $300 each year afterward in franchise tax, before registered agent renewal is even added. Because the charge is fixed and unrelated to income, a Delaware LLC that earns nothing still owes the full amount, which makes the true multi-year cost of the entity meaningfully higher than the one-time formation fee makes it look at first glance.

The common mistake is confusing franchise tax with income tax, or assuming that a state with no income tax also has no recurring entity fee. Franchise tax is owed even by a completely dormant LLC with zero revenue, and missing the June 1 deadline triggers penalties and interest and eventually loss of good standing. That lapse can cascade into administrative dissolution, at which point the owner must pay all back amounts plus reinstatement costs to revive the entity.

Among the anonymity states the ongoing burden varies sharply: Delaware's $300 franchise tax, Wyoming's $60 annual report, Nevada's higher business-license and Annual List cost, and New Mexico with no annual report at all. Because this expense recurs every year, founders who plan to hold an entity long-term should weigh Delaware's franchise tax against Wyoming's or New Mexico's far lower upkeep when choosing where to form. The formation price is a one-time number; franchise tax is what quietly dominates the lifetime cost.