Franchise Tax

Franchise tax is one of the most misleading names in US business. It has nothing to do with franchises like fast-food chains, and despite the word tax, it is not based on your income. It is a flat fee some states charge a company simply for being registered there. Think of it as annual rent for your LLC's legal existence.

Delaware is the best-known example for non-resident founders. Every Delaware LLC owes a flat $300 franchise tax each year, due June 1, whether the company earned millions or never opened a bank account. Miss the date and Delaware adds a $200 penalty plus interest, and a company that stays delinquent loses its good standing, which can block banking and certificates you may need abroad. Other states take different approaches: Wyoming has no franchise tax for LLCs and instead requires an annual report with a fee starting at $60, while California charges most LLCs at least $800 per year.

The crucial point for a foreign founder is that franchise tax lives entirely in the state system. Paying Delaware its $300 does nothing for the IRS, and filing your federal forms does nothing for Delaware. A foreign-owned single-member LLC in Delaware has at least two separate calendars: Form 5472 with the pro forma Form 1120 to the IRS by April 15, and the franchise tax to the state by June 1. A multi-member LLC swaps the first item for Form 1065 by March 15.

When comparing states, look at the whole yearly cost rather than the formation fee alone. A Wyoming LLC might cost $60 a year to maintain while Delaware costs $300, yet both carry exactly the same federal duties and the same $25,000 exposure for a missed Form 5472. The state choice changes your maintenance bill, not your IRS obligations.

Typical yearly state costs for popular LLC states

• Delaware: $300 flat franchise tax, due June 1
• Wyoming: annual report with a fee starting at $60
• New Mexico: no annual report or franchise tax for LLCs
• California: at least $800 per year for most LLCs