Franchise Tax
A franchise tax is an annual fee most US states charge to operate a business entity (LLC or corporation) within their borders. It's separate from federal income tax and varies widely by state, making it a key cost to factor into your US business setup.
What is a Franchise Tax?
A franchise tax is a yearly state-level fee that allows you to legally conduct business as a registered LLC or corporation in a specific US state. It is not a tax on profit; it's a privilege tax or licensing fee imposed simply for the right to operate under that state's laws.
Think of it as a maintenance cost. Even if your US LLC makes no revenue, many states still require you to pay this annual fee to keep your business license active.
Key Differences by State
Franchise tax rules and amounts vary dramatically across US states:
- Wyoming: No franchise tax. This is a primary reason why so many non-US founders choose Wyoming as their LLC state of incorporation.
- California: Annual $800 minimum, plus additional tax if gross income exceeds $250,000.
- Delaware: $125 annually for most LLCs; no tax on LLC income itself.
- Florida, Texas, Nevada: No franchise tax on LLCs.
- New York: Ranges from $25 to $4,500 depending on income.
How Franchise Tax Affects Non-US Founders
If you are a European founder forming a US LLC with a foreign Employer Identification Number (EIN) via Form SS-4, you'll file Form 5472 (Information Return of a Foreign Corporation) annually with the IRS, even at zero income. You'll also file a pro-forma Form 1120 (US Corporation Income Tax Return). These filings are informational only and do not calculate federal tax owed, but they are mandatory for foreign-owned single-member LLCs.
Separately, your state of incorporation will charge franchise tax. Failure to pay it can result in dissolution of your LLC or penalties.
Common Misconception
Franchise tax is not the same as income tax. You can owe franchise tax even if you have zero revenue. This is crucial for founders in their first year or those operating as a pass-through entity (where profit flows to personal tax returns).
Why Wyoming is Popular
Because Wyoming charges no franchise tax, plus it offers strong privacy and asset protection, it has become the default choice for many non-US founders. Combined with a remote bank account at Mercury, Wise, or Relay (all of which onboard non-US founders remotely), Wyoming provides a low-cost, simple setup.
Practical Example
You are a German entrepreneur. You set up a Wyoming LLC to sell SaaS to US and European customers. Your first year, you earn no revenue. In Wyoming, you pay no franchise tax. In California, you would owe $800 minimum despite zero income. By choosing Wyoming, you save money and administrative burden in year one, and your LLC remains active.
Calculating Your Total State Cost
| State | Annual Franchise Tax | Notes |
|---|---|---|
| Wyoming | $0 | No franchise tax; popular for foreign founders |
| Delaware | $125 | Flat fee for LLCs; very predictable |
| Nevada | $0 | No franchise tax on LLCs; strong privacy |
| California | $800 minimum | Plus additional fees if gross receipts exceed $250k |
| New York | $25 to $4,500 | Scale based on gross income |
How Founders Credit Helps
When you work with Founders Credit, we handle your complete US business setup done-for-you. That includes choosing the right state of incorporation (usually Wyoming for cost savings), filing your EIN via Form SS-4 fax as a non-resident, and ensuring your annual franchise tax is paid on time. We also manage your compliance filings, such as Form 5472 and pro-forma returns, so you don't miss deadlines or incur penalties.
Bottom Line
Franchise tax is an unavoidable annual cost in most US states, but you can minimize it by choosing a state with no franchise tax (Wyoming, Nevada, or Texas) combined with sound filing practices. For a European founder aiming to keep costs low while building US business credit, understanding and planning for franchise tax is essential.
Frequently asked questions
What happens if I don't pay franchise tax?
Most states will dissolve your LLC and charge penalties. You lose your legal standing to do business, and creditors or tax authorities may pursue you.
Can I deduct franchise tax on my tax return?
Yes, franchise tax is typically deductible as a business expense on your US tax return (Form 1120 or Schedule C), reducing your overall tax liability.
Do I owe franchise tax if my LLC made zero revenue?
In most states, yes. Franchise tax is a privilege fee, not an income tax. Wyoming, Nevada, and Texas are exceptions; they charge no franchise tax regardless of income.
Is franchise tax the same as the EIN fee?
No. An EIN is free (Form SS-4 fax) and is your federal tax ID. Franchise tax is a separate state annual fee you pay to keep your business license active.
Want this done for you?
Founders Credit sets up your US LLC, ITIN, banking and credit cards end to end, 100% remote. Skip the guesswork.
Book a free strategy call →