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. They represent two possible costs that corporations, LLCs, and nonprofit corporations have each year throughout the life of the business. Understanding a company’s annual report and franchise taxes can help evaluate your entity choices and plan for this annual need.
Understanding Annual Reports
For many, the only exposure they’ve had to annual reports are what they’ve received as a shareholder in a public company or from a charity they gave to. These are reports companies provide to their owners or donors that contain details about the way they run. However, there is another annual report. Its filed with the state agency in charge of business entities in the state where the business formed. In addition, each state where the company registered to do business.
This annual report asks for certain information about the company, which varies by state and entity type. Commonly asked details include:
- The principal business address
- The names and addresses of those managing the business (directors and officers for corporations, members or managers for LLCs, general partners for LPs and LLPs)
- The name of the registered agent and address of the registered office
- Occasionally, a corporation needs the number of stock shares issued.
Fees for filing a business’s annual report vary by state and entity type.
Purpose of Annual Reports
While nearly every state wants a periodic report filed, not all need them filed each year. Some have reports due every other year. Whether every year or every other year, the purpose of a company’s annual report is the same.
This primary purpose is to provide updated information on the business. States consider it important for some company information to be easily accessible to the public. Many details for a business can change in a year. The business may have moved locations. Members, managers or directors may have changed. The registered agent may have changed or moved. The annual report provides the state with a means for keeping updated information on businesses.
Another purpose is to provide Income for the state. State governments often look for more money. Because all businesses incorporated or registered to do business in the state pay annual report fees, they represent a consistent source of revenue for the state.
Understanding Franchise Taxes
Despite the name, this is not a tax imposed on franchises. Businesses pay a franchise tax for the privilege of organizing a business or registering to do business in that state. Being able to run as a corporation or LLC brings certain advantages such as limited liability. Think of a franchise tax as the state’s fee for providing authority that allows businesses to incorporate or register in the state. The method for calculating franchise tax varies by business type and by state. Common methods include:
- Business income
- Business assets
- Number of outstanding shares of corporate stock and their value.
- Combination of above
- Flat fee
When are annual reports and franchise taxes due?
Due dates for a company’s annual report and franchise tax also vary by state. Often, the franchise tax is due with the annual report. Many states have due dates tied to the anniversary date, making them due in the same month in which the business incorporated. For example, for an LLC formed February 15th, the due date for that LLC’s annual report and franchise tax is February of each year.
Other states choose one date the annual report and franchise tax are due. It may be consistent across business types or it may vary. For example, in Delaware, franchise tax for corporations is due March 1st and franchise tax for LLCs is due June 1st.
Keep in mind that some states also have reports that businesses must file shortly after incorporation. These reports often collect information not needed in the incorporation documents, and typically have a filing fee.