Franchise taxes levied, usually by a state tax authority, on businesses at the entity level. They may or may not be tied to an entity’s revenue or profit.
For example, California levies a flat tax of $800 on all limited partnerships regardless of net income or gross receipts, but California also levies a tax on LLCs that ranges from $800 to more than $12,000, depending on the LLC’s gross revenue.
LLCs do not pay franchise taxes in most states, but there are several exceptions. For example, LLCs are subject to the California gross receipts tax, the Texas gross receipts tax (levied only on businesses whose annual gross receipts exceeds $300,000), and Pennsylvania’s capital stock tax. In states that levy franchise taxes, these taxes can sometimes but not always be legally reduced or avoided by using a limited partnership instead of an LLC. Such is the case with Pennsylvania, for example, however no tax breaks are given to Texas LPs, and California LPs will still pay $800 annually, which may or may not be less than what a company would pay in California it were an LP instead of an LLC.