Forfeited franchise tax simply means that the entity’s right to conduct or transact business has been forfeited. Note that a franchise tax has nothing to do with whether or not a business is a franchise. Instead, it is one of the state levies businesses are expected to pay just for doing business in that state.
To make sure that your business stays legal, depending on the state and county, you may have to file an annual franchise tax report every year. Have it in mind that this franchise tax report notes how much tax your limited liability company (LLC) or corporation is expected to pay, as well as keeps your information up to date in state databases.
In the United States, the state’s franchise tax varies and some states have it in addition to or instead of income tax or other small business taxes. Also note that the businesses expected to pay it, how it is calculated and some other details all vary from state to state.
This tax is mostly charged to some businesses that either do business or are incorporated in a certain state. Also, note that a business can even be expected to pay a franchise tax just for owning property in a state.
Aside from the fact that you can voluntarily forfeit your corporation, note that the Secretary of State’s office or the Franchise Tax Board is required by law to forfeit a business’s right to transact business once it fails to file a franchise tax report within a stipulated time.
The law also mandates the board to make available at least 45 days after the notice of pending forfeiture is mailed before the actual forfeiture. Any franchise tax deficiencies will have to be settled within that time frame to avoid the forfeiture of the right to do business in the state.
Once the corporate privileges are forfeited, it no longer has the right to carry out business and each director or officer will be liable for the debt of the entity. A forfeited corporation does not stop being an association; rather it loses all the rights and privileges of a corporation and cannot legally act as a corporation while forfeited.
The Secretary of State’s office or the Franchise Tax Board, which has the authority to suspend a corporation, tends to leverage this power to sanction the company. The repercussions of a corporation or business being forfeited can be quite massive.
Just as it was noted above, once a corporation is forfeited, it relinquishes its privileges and status. This includes the company’s right to enforce any of its contracts or get an extension to file tax returns. In addition, it can lose its name as long as another company files under the same name with the Secretary of State while the corporation is forfeited.
This entails that the company would have to change its name in order to become incorporated again. Note that these repercussions can cause the company to lose business and the directors to become exposed and prone to litigation since they are no longer protected by the corporation’s limited liability protection.
States That Have Franchise Tax in the United States
Note that just a few states in the US expect businesses to pay some sort of franchise tax. In some places, these taxes are also charged in addition to the other states’ taxes. Presently, the states in the US with any form of franchise tax include Alabama, Arkansas, California, Delaware, Georgia, Illinois, Louisiana, Mississippi, New York, North Carolina, Oklahoma, Tennessee, and Texas. Washington D.C. also has a franchise tax.
Franchise tax was abolished in West Virginia in 2015 and Kansas in 2011. It has also been eradicated in Missouri and Pennsylvania. Don’t forget that a franchise tax is not the same as the standard income tax a business is expected to pay when filing taxes each year. You can visit the IRS website to learn more about income tax for different business structures like partnerships and limited liability companies, or LLCs, on a federal level.
How Much is Franchise Tax and How Can You Calculate It?
The same way everything concerning taxes varies based on the location of and the type of business you run and own, is the same way franchise tax varies, and the more reason entrepreneurs are advised to research to be conversant with the specifics of the franchise tax in their state.
In some states, the franchise tax is a flat rate and this makes it very easy to calculate depending on the type of business you run. However, in other places, this type of business tax is calculated in varying ways. The metrics that can be used to calculate franchise tax include: the percentage of the assets of a business, a percentage of the net worth of the business, or even the gross receipts of the business for the tax year.
It is imperative to note that how much you are expected to pay as franchise tax has nothing to do with the income of your business in a given year. According to reports, the State of Delaware has some of the highest tax rates. The lowest franchise tax for any business in the state will be $175 and the total tax can be calculated in numerous ways. Those non-stock for-profit businesses will pay $175.
In Delaware, businesses can calculate their franchise tax leveraging the Authorized Shares Method or the Assumed Par Value Capital Method. Every one of these methods is well explained on the Delaware Division of Corporations website, and some tend to have a higher minimum cost than others do.
Just like Delaware, some other states have calculators or insights into how you can calculate the specific tax on their websites. Note that each state calculates the tax differently, therefore it is recommended that you carry out extensive research and also double-check before filing.
Some states like New York, mandate business owners to calculate their tax in several ways and then pay the highest calculation. Also, don’t forget that business owners who fail to pay their franchise tax can face repercussions that could threaten the success or existence of their business.
Most often, businesses that are mandated to register with the state are also expected to pay a franchise tax. Howbeit, businesses owned and managed by one person, or sole proprietors, may not be subject to franchise tax in some states where they are also not required to register with the state.
Note that businesses that fail to pay their franchise tax can face issues such as losing their legal standing and the ability to do business or remain in binding contracts in the state. Also, note that they can lose the standing to file lawsuits or be part of any legal action as well.