If you want to run a franchise business successfully, you need to be on top of federal and state legislation requirements, franchise laws and all the financial responsibilities that go with the job. It is also important to have a firm grasp of business language and terms, such as “franchise tax”, that are in common use. This is why people often enlist the help of a franchise consultant and a franchise lawyer. These are the people who can safely guide you through the process.
What You Need to Know About Franchise Tax
Despite its name, franchise tax does not mean a specific tax for franchisors or franchisees. It is imposed on different kinds of businesses, such as limited liability companies (LLCs), partnerships, and corporations. It is also popular as a “privilege” tax. The reason is that states have the right to charge businesses for the privilege of doing business on their territory. Note, franchise tax is not to be confused with federal and state income tax. If you decide not to use franchising lawyers, here are some key points you need to know:
Check the Legislation in Your State
The US government does not set out the rules and regulations of franchise tax; states regulate them. Therefore, the first important step is to check if there is indeed a franchise tax law in your state. For example, there is currently no franchise tax in Kansas or Missouri. This situation is subject to change, however, so always do your research. The Department of Revenue in your state will be able to inform you of which taxes apply to your business.
How Much Is Franchise Tax?
The amount of franchise tax corporations and businesses pay very much depends on the state in which the business operates. It is not calculated by profit. It could be a flat-rate fee or it could be based on the size of your business. For example, California’s franchise tax for LLCs is charged at a minimum of $800. Still, you may be exempt in this state if you are a newly registered business, see below. There is a great deal of legal and financial information to process when you are getting your franchise business up and running. This is where the help of a franchise lawyer can be invaluable.
How Franchise Tax Affects Your Business
This ultimately depends on how you classify your business. Franchisees should research what type of legal entity will work best for them before they start trading. For example, many franchises operate as LLCs. Speak to a franchise consultant if you need advice in this area. Whether or not you pay franchise tax also depends on where you do business. In some states, this particular tax won’t affect small franchise businesses if they have annual receipts below a certain threshold. In Texas, for example, the threshold for 2020-2021 is $1,180,000.
If your franchise business is registered in California, you will likely have to pay franchise tax. However, there is some financial relief for small businesses in the wake of the COVID-19 crisis thanks to the state law changes. Californian LLCs formed between January 1, 2021 and January 1, 2024 won’t have to pay the franchise tax in their first taxable year.
Exemptions and Deadlines
Corporations and enterprises doing business in a state that implements franchise tax must pay what is due, unless they have a sole proprietor business or a nonprofit one. There are other exemptions too, so make sure you research this in more detail. If you are required to pay franchise tax, you must do so by the set deadline. Failure to do so can result in a fine or, worse, you may lose your license to do business in that state. Some states may offer extensions to deadlines. For example, Texas Comptroller’s Office has extended its franchise tax deadline to June 15, 2021.
Need Extra Help?
Are you struggling to work out which taxes you must pay? As a business owner, it is your responsibility to investigate and be fully aware of which taxes you owe and when they are due. Understanding the differences between a limited liability company (LLC), sole proprietors, general partnerships and so on will also help you navigate the taxable year. There is no denying that taxation is a complex system to get your head around, especially when you are busy with the day-to-day running of your franchise business. If you need extra help with financial matters and franchise regulations, don’t hesitate to seek professional advice.
It is typically corporations and partnerships with a nexus in the state that pay a franchise tax. The key point to remember is that it is not a tax specifically directed at franchisees. Even if you don’t need to pay this particular tax, it is important to be aware of tax legislation in your state. The financial side of running a business can be challenging and time-consuming. However, the more organized and informed you are, the easier it becomes. Using a checklist in your car wash business can help you keep on top of administrative paperwork and this should include your tax payments.
We understand that not everyone is comfortable with the complexities of the tax system. Matters become easier with the support of an established brand behind you. A good way to start is to check out the DetailXPerts franchise opportunity. Our exclusive franchise training program gives new franchise owners like you access to decades of experience and expertise in setting up and operating your own business to the best of your interests.
Also, take a moment to follow DetailXPerts on LinkedIn where you can join in more business and franchise conversations.