One Disadvantage of LLCs: Franchise Taxes

If you are considering forming your new business as an LLC (Limited Liability Company), you need to be aware that some states might add a "franchise tax" to your state tax bill, for the "privilege" of having limited liability. Here are some examples:

• California levies a minimum $800 annual franchise tax, although there have been legal challenges to this tax as unconstitutional
  
• Delaware charges a $200 annual franchise fee
  
• Texas requires all legal entities except sole proprietorships and general partnerships to pay franchise taxes
  
• Other states which require franchise taxes include Alabama, Kentucky, New York, Pennsylvania, and Tennessee

Wikipedia notes that:

The franchise tax can be an amount based on revenue, an amount based on profits, or an amount based on the number of owners or the amount of capital employed in the state, or some combination of those factors, or simply a flat fee, as in Delaware.

Finally, before you get too upset about the concept of franchise taxes, LLCs usually pay taxes at personal tax rates, which in many cases are lower than corporate tax rates.

Check with your state's Secretary of State for more information about franchise taxes.