Franchise tax in a nutshell

If you own a business in Arkansas, you likely have an important deadline approaching as the annual franchise tax deadline is May 2. I often get a lot of questions about this tax, including what it’s for and who has to pay so I thought I would go over the basics in this month’s blog. 

One big misconception is that the “franchise tax” is a tax due only from franchises operating in the state. For example, some people think that only owners of chain restaurants owe this tax. That is now what franchise means in this case.

A franchise tax is one that the state levies against a business for the privilege of doing business in that state. Each state’s franchise tax varies, and some states have it in addition to or instead of income tax or other small business taxes. In Arkansas, the rules related to this tax are dictated by A.C.A. § 26-54-101 et al., also known as the Arkansas Corporate Franchise Tax Act of 1979. Franchise taxes are managed and collected by the Arkansas Secretary of State’s office. 

According to the Arkansas Secretary of State, “Arkansas state law requires all Corporations, LLCs, Banks, and Insurance Companies registered in Arkansas to pay an annual franchise tax. Failure to pay can result in the imposition of additional fees, penalties and interest, or even revocation of the authorization to do business. Franchise taxes continue to accrue, even for revoked businesses, until the business is dissolved, withdrawn, or merged.  Any additional filings with our Business & Commercial Services division will be prohibited for persons or entities that fail to pay the franchise tax.”

Franchise taxes are only one of several taxes Arkansas businesses must pay. Be careful to not get them confused. Franchise taxes in Arkansas are a flat rate and are not based on your profit margin. Also, the amount of franchise tax due will be the same whether you make money or not.

 One final important fact to mention is that any overdue franchise taxes must be paid before you can begin any other business in Arkansas. So even if you haven’t operated your last business for several years, if you didn’t pay the franchise tax and officially dissolve the business, you’ll have to do that before starting another one. 

You can learn more about how much to pay for your franchise tax on theSecretary of State website. The rate varies on your business classification. You can also pay online from that website. If you need help figuring out how to pay or how much franchise tax to pay, give me a call. I’m happy to help!