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What is Franchise Tax?
Posted on October 21, 2010 by Lindsay Hall

Albert Einstein once said about filing taxes, “This is too difficult for a mathematician. It takes a philosopher.” While I don’t think that Einstein was a franchisee, it’s easy to see how many people in the franchising industry could share his opinions. So, what is franchise tax, and is it really that confusing? A franchise tax is a tax levied by a state on a business owner, for the privilege of doing business in that state. Every state calculates this tax differently, often on an individual basis. It certainly can get confusing, with factors such as the taxpayer’s net worth, net income and amount of stock sold in the mix, and it is advisable for every franchisee to seek professional counseling to complete a franchise tax return correctly.

Not only do the franchise tax rate calculation methods vary from state to state but the percentage that must be paid varies as well. Some states, such as Delaware have a higher franchise tax percentage rate. Some, such as Nevada, have none at all, or a small flat fee. Bonus for you, Nevada! When doing research, a helpful hint you can use is that states with higher corporate tax rates have lower franchise tax rates. When you are doing your franchise research and evaluating locations, tax rates can have a big impact on your decision.

When involved with franchise tax, I can’t emphasize enough the value of consulting with a franchise lawyer. A good lawyer at your service is a big step towards making sure everything for your franchise tax return will be accurate, avoiding costly penalties. Experienced counsel will also be able to clue you in on the types of businesses that can be exempt from certain taxes. Non-profit satellite offices and some limited liability companies could be given a pass. For those not lucky enough to get a free pass, a franchising lawyer can help you work things like green energy and renewable fuel into your business plans. Many states, such as North Carolina, offer tax breaks to franchisees that can incorporate renewable resources into their daily operations.

John Maynard Keyes said, “The avoidance of taxes is the only intellectual pursuit that carries any reward.” This makes sense to me, why pay any more than you have to? With so many variables involved in franchise tax law it’s easy to get in over your head. The easiest thing to do to avoid making costly franchise tax law mistakes is to find a lawyer that specializes in franchising. They do all the work for you, and you will be free to do what you do best, run your business.

External Resources

Small Business Administration

A government resource for finding information on planning, mentoring, and strategies for franchises and small businesses.
SBA Small Business Planner

USA.gov Business Gateway

Resources for every step in planning your business or non-profit, from getting your EIN to handling wages.  
USA.gov Business Gateway

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