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 corporations, limited liability companies (LLCs), limited liability partnerships (LLPs), limited partnerships (LPs) and nonprofit corporations have each year throughout the life of the business. 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.
Understanding annual reports
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 corporation, LLC, LP, or LLP is organized (its domestic state) and in each state where it is registered to transact business (through a process called foreign qualification)—no matter how large or how small the business.
This annual report asks for certain information about the company, which varies by state and entity type. 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, general partners for LPs and LLPs)
- 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 a business’s annual report vary greatly by state and entity type.
Purpose of annual reports
While nearly every state requires a periodic information report to be filed, not all require them to be filed annually. Some have biennial reports (due every other year) instead. Whether annual or biennial, the purposes of a company’s annual report remain the same.
- Provides updated information on the business. 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 in the course of 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 keeping updated information on businesses. This is the primary purpose.
- 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, they represent a consistent revenue source for the state.
Understanding franchise taxes
Despite what the name suggests, this 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. Being able to operate as a corporation, LLC, etc., 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 entity type. Common methods include the following:
- Business income
- Business assets
- Number of outstanding shares of corporate stock and the par value of those shares
- Combination of above
- Flat fee
When are they 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 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 corporations and/or LLCs must file shortly after incorporation or formation. The initial list collects the data that businesses are not required to include in their incorporation or formation 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
The Ongoing Corporation Requirements and Ongoing LLC Requirements pages of BizFilings' state incorporation guides outline the annual report and franchise tax requirements for corporations and LLCs in all states.