Annual reports and franchise taxes—two phrases that really 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 C corporations, S 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 incorporation 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 or from a charity or foundation to which they’ve donated. But there is another type of annual report that states require from companies that are incorporated or registered to transact business (through a process called foreign qualification)—no matter how large or how small the business.
The annual report typically asks for certain business information, which varies by state. Commonly requested details include:
- The principal business address, and the names and addresses of the management of business (directors and officers for corporations and members/managers for LLCs).
- 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. In some instances, there is no charge; however, the range is typically around $50 up to $400.
Purpose of annual reports
Not all states have annual reports. Some have biennial reports (due every other year) instead. Whether annual or biennial, the primary purpose of a company’s annual report remains the same.
- Revenue stream for the state. We can be honest. 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.
- Provides updated information on the business. 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 annual report provides states with a means for keeping updated information on businesses.
Understanding franchise taxes
Despite what the name suggests, this is not a tax imposed on franchises. Rather, a franchise tax is imposed on businesses basically for the mere privilege of being incorporated or registered to transact business in that state. The method for calculating franchise tax varies by state. Common methods include:
- 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. Many states have due dates tied to the anniversary date, making them due in the same month in which the business was incorporated 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 for all business types or it may vary by business type. One example is Delaware: annual reports and 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. The initial list collects the data that businesses are not required to include in their 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
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.