Annual reports and franchise taxes are two phrases that may not mean much to individuals considering starting a business. Even to existing business owners, these might come as a surprise the first time they’re due. But they represent two possible ongoing costs that limited liability companies (LLCs) and corporations have each year throughout the life of the business.
These requirements apply to other business structures such as limited liability partnerships (LLPs), limited partnerships (LPs), and nonprofit corporations. Understanding your company’s annual report and franchise tax obligations, as well as costs, can help you evaluate your entity choices and plan for this annual requirement.
What is an annual report for an LLC or corporation?
For many, the only exposure they’ve had to annual reports is what they’ve received as a shareholder in a public company (a Form 10-K) or from a charity or foundation to which they’ve donated. These are reports companies provide to their owners or donors that contain detailed information about their operations.
But there is another type of annual report — one that is filed with the state agency in charge of business entities (often the Secretary of State) in the state where the LLC or corporation is organized (its domestic state) and in each state where it is registered to transact business (through a process called foreign qualification). This applies to all LLCs and corporations, no matter how large or how small those businesses are.
An annual report for an LLC or corporation requires certain information about the company, which varies by state. Commonly requested details include the following:
- The principal business address
- The names and addresses of the management of business (directors and officers for corporations, members/managers for LLCs)
- The name of the registered agent and address of the registered office
- In some cases, the number of shares of stock a corporation has issued is also required.
Fees for filing an annual report for a business vary greatly by state and entity type.
Purpose of annual reports
While nearly every state requires information reports to be filed periodically, not all require that information to be filed annually. Some states have biennial reports (due every other year) instead. Whether annual or biennial, the purpose of a company’s annual report remains the same.
- Provide updated information on the business — Keeping business information up to date is the primary purpose for filing an annual report. The states consider it important for certain information about a company to be easily accessible to the public. Many details for a business can change over a year. The business may have moved locations. Management of the business might have changed. The registered agent may have changed or moved. The annual report provides states with a means for having current information on businesses.
- Supply revenue stream for the state — State governments are often looking for additional revenue streams. Because annual report fees are imposed on all businesses incorporated or registered to transact business in the state, annual report filings represent a consistent revenue source for the state.
What is franchise tax for an LLC or corporation?
Despite what the name suggests, a franchise tax is not a tax imposed on franchises. Rather, a franchise tax is imposed on businesses for the privilege of being organized or registered to transact business in that state. (In some states, this tax is referred to as a privilege tax.) Franchise tax is separate from state and federal income taxes that need to be filed each year.
Being able to operate as an LLC or corporation brings certain advantages, such as limited liability. A franchise tax can be thought of as the state’s fee for providing the statutory authority that allows these business entities to be organized or registered in the state.
The method for calculating franchise tax varies by state and whether you are an LLC, corporation, or other entity type. For example, some states only require C corporations to pay a franchise tax. Common methods for determining franchise tax may be based on the following:
- Gross receipts
- Net worth
- Number of outstanding shares of corporate stock and the par value of those shares
- Combination of the above
- Flat fee
Franchise tax and nexus
Navigating the challenge of nexus remains a concern for businesses operating across state borders. Tax nexus, the link allowing a jurisdiction to tax a business, can arise from various activities, including sales and use tax, income tax, and franchise tax. The Supreme Court's South Dakota v. Wayfair decision shifted from requiring a physical presence to adopting the economic nexus standard, focusing on a business's economic activity within a state. This change, particularly impactful for online sales, expands nexus to more states than before.
When are annual reports and franchise taxes due?
Due dates for a company’s annual report and franchise tax also vary by state. In many cases, the franchise tax is due at the same time as the annual report. Many states have due dates tied to the anniversary date, making them due in the same month in which the business was organized or foreign qualified. For example, if an LLC was formed on February 15th, the due date for that LLC’s annual report and franchise tax would be February of each year.
Other states choose one date that the annual report and/or franchise tax is due. This may be consistent with all business types or it may vary by business type. One example is Delaware: franchise taxes for corporations are due March 1st and the due date for LLCs is June 1st.
Keep in mind that some states also have initial reports that LLCs and corporations must file shortly after formation or incorporation. The initial list collects the data that businesses are not required to include in their formation or incorporation documents (such as names and addresses of company management). Initial reports also typically have a state filing fee.
Learn more about your state's requirements
Our state incorporation guides outline the annual report, franchise tax, and other requirements for LLCs and corporations in all states. Learn more about annual report due dates by state and entity types.
