How Franchises Are Taxed

You may be wondering on what the process is that is involved when the government taxes franchise companies.

For us to be able to fully understand the way of taxing franchises, we should first study the nature of the franchise industry itself.

What are franchises? Actually, these are companies which already have an effective business plan and then sell it to other entrepreneurs who are called franchisers. There are a number of advantages of purchasing a franchise as compared to just starting up a business of your own and one is that you do not need to develop a business plan because the franchise company will already provide you with such. These business plans are proven to be effective; they wouldn’t sell it if they are not in the first place.

But just like any other type of businesses, these franchises are also subject to tax but the difference is that the process of taxing a franchise company is different from taxing a traditional business. Take note that not all states have the same franchise tax; they vary depending on the requirements of each state. Since there are several policies involved in taxing a franchise, the franchise company should comply with it to avoid getting into trouble.

One peculiar thing about franchise tax is that they are not based on the income of the entity itself but with the net income or net worth of the taxpayer or also known as the owner or owners of a certain franchise company. Usually, the franchise tax is based on the amount of shares of a stockholder; also, the franchise tax can be based on the asset of the individual.

Franchise tax varies depending on the state, for instance, the state of Delaware issues a large franchise tax. Unlike other states such as the state of Nevada, they have less-significant franchise taxes. In case that you are wondering on where the franchise tax money goes, always remember that the franchise tax that an individual pays goes directly to the fund of the state which is used in funding certain projects to improve the state. In other words, the franchise taxes help in the betterment of a particular state.

Meanwhile, having said that every state has a different amount of franchise tax, the states that earn a lot from corporate income taxes usually have a very small franchise tax. This means that the higher the corporate income tax is, the smaller the franchise tax will be in a particular state. This is one of the reasons on why the state of Delaware has a significantly large amount of franchise tax as compared to other stats; because the state does not have a high corporate income tax.


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