Texas LLC Franchise Tax Explained: Rates, Thresholds & Wyoming Alternative

Does Texas charge a franchise tax on LLCs?

Yes. Texas imposes a franchise tax on every LLC, limited partnership, corporation, and other taxable entity that does business in the state. The franchise tax applies regardless of whether the LLC was formed in Texas or registered as a foreign LLC.

The Texas franchise tax is officially called the Texas Margin Tax. It replaced the old Texas franchise tax structure in 2008 under House Bill 3 (2006). The tax applies to total revenue rather than net income, which makes it fundamentally different from a traditional income tax. Texas is one of only a few states that taxes gross revenue margins instead of net profit.

Every LLC that does business in Texas must file an annual franchise tax report with the Texas Comptroller of Public Accounts. This filing requirement exists even if the LLC owes $0 in tax because its revenue falls below the no-tax-due threshold. The annual report is due on May 15 each year for LLCs with a December 31 fiscal year-end.

The franchise tax rate depends on the type of business the LLC conducts. Qualifying wholesale and retail businesses pay 0.375% of their taxable margin. All other businesses pay 0.75% of their taxable margin. These rates apply only to revenue above the no-tax-due threshold of $1.23 million in annualized total revenue.

Texas designed the franchise tax as its primary business tax because the state has no personal income tax. The franchise tax generates approximately $4 billion per year in state revenue and applies to roughly 1.5 million Texas business entities. For small LLCs with revenue below the threshold, the tax creates no financial burden but does create an annual filing obligation.

How is the Texas franchise tax calculated?

Texas franchise tax is calculated by multiplying the applicable tax rate (0.375% or 0.75%) by the LLC's taxable margin, which is total revenue minus the highest of four available deductions. The calculation uses a margin-based approach unique to Texas.

Step 1: Determine Total Revenue

Total revenue is the starting point for the franchise tax calculation. For LLCs, total revenue equals gross revenue from all sources minus returns, allowances, and certain statutory exclusions. Total revenue includes sales, services, rents, royalties, interest, and other income. It does not include capital gains from the sale of real property or certain flow-through funds.

The Texas Comptroller defines total revenue broadly to capture the full scope of an LLC's economic activity. LLCs must calculate total revenue using generally accepted accounting principles (GAAP) or IRS reporting methods, depending on their accounting system.

Step 2: Choose the Highest Margin Deduction

Texas allows LLCs to subtract the highest of four deductions from total revenue to arrive at the taxable margin. The four deduction options are:

• Cost of Goods Sold (COGS): Direct costs of producing or acquiring goods sold by the LLC, including materials, labor, and manufacturing overhead. Best for product-based LLCs with high material costs.
• Compensation: Total employee compensation including wages, salaries, bonuses, benefits, and payroll taxes. Best for service LLCs with high payroll relative to revenue.
• 30% Standard Deduction: A flat 30% of total revenue. Best for LLCs that do not have high COGS or compensation expenses. This is the simplest option and requires no itemized documentation.
• $1 Million Deduction: A flat $1 million subtracted from total revenue. Best for smaller LLCs with total revenue between $1.23 million and approximately $2 million.

The LLC selects whichever deduction produces the lowest taxable margin. The choice can change each year based on the LLC's financial situation. An LLC with $2 million in total revenue and $800,000 in COGS would choose the $1 million deduction because $1 million is greater than $800,000 and greater than $600,000 (30% of $2M).

Step 3: Apply the Tax Rate

After calculating the taxable margin (total revenue minus the chosen deduction), the LLC applies the appropriate tax rate:

• 0.375% for qualifying wholesale and retail businesses (businesses primarily engaged in selling tangible personal property)
• 0.75% for all other businesses (services, consulting, technology, professional services, etc.)

An LLC must qualify under the Texas Tax Code definition of wholesale or retail to use the lower rate. The determination is based on the primary nature of the business, not a percentage threshold. If more than 50% of total revenue comes from wholesale or retail sales of tangible personal property, the LLC qualifies for the 0.375% rate.

Franchise Tax Calculation Example

What is the no-tax-due threshold for Texas LLCs?

The Texas franchise tax no-tax-due threshold is $1.23 million in annualized total revenue for the 2024-2025 report years. LLCs with total revenue at or below this threshold owe $0 in franchise tax but must still file a No Tax Due Report with the Texas Comptroller.

The no-tax-due threshold was originally set at $600,000 when the revised franchise tax took effect in 2008. The Texas Legislature has increased the threshold multiple times: to $1 million in 2014, $1.08 million in 2016, $1.11 million in 2018, $1.18 million in 2020, $1.23 million in 2024. The Comptroller adjusts the threshold periodically based on the Consumer Price Index (CPI) to account for inflation.

LLCs below the threshold file the No Tax Due Report (Form 05-163) instead of the full franchise tax report. This is a simplified one-page form that confirms the LLC's total revenue does not exceed the threshold. The form is due on May 15 each year. Even though no tax is owed, failure to file this form results in penalties and potential forfeiture of the LLC's right to do business in Texas.

The threshold applies to annualized total revenue. If an LLC operated for only part of the year, the Comptroller annualizes the revenue to determine whether it exceeds the threshold. An LLC that earned $800,000 in six months of operation has annualized revenue of $1,600,000, which exceeds the threshold.

LLCs that fall just below the threshold in one year and just above it the next face significant compliance changes. Crossing the threshold requires switching from the No Tax Due Report to the full franchise tax report (Form 05-158 or 05-169), selecting a margin deduction method, and potentially owing substantial franchise tax. This unpredictability is one reason non-residents prefer Wyoming's flat-fee structure.

No-Tax-Due Threshold History

What are the Texas franchise tax reporting requirements?

Every Texas LLC must file an annual franchise tax report with the Texas Comptroller of Public Accounts by May 15. The specific forms required depend on the LLC's revenue level and tax liability.

Filing Tiers Based on Revenue

Texas divides franchise tax filers into three tiers based on total revenue:

• No Tax Due (revenue at or below $1.23M): File Form 05-163 (No Tax Due Report) and Form 05-102 (Public Information Report). No tax payment required.
• EZ Computation (revenue between $1.23M and $20M): File Form 05-169 (EZ Computation Report) and Form 05-102. Tax is calculated at a reduced rate of 0.331% of total revenue with no deductions. This simplified method avoids margin calculations.
• Long Form (revenue above $20M or choosing margin method): File Form 05-158-A/05-158-B (Franchise Tax Report) and Form 05-102. Full margin calculation with deduction selection required.

Public Information Report (Form 05-102)

Every LLC that files a franchise tax report must also file the Public Information Report (PIR). This form requires disclosure of the LLC's officers, directors, managers, and members. Texas makes this information publicly available through the Comptroller's website. This public disclosure is a significant privacy concern for non-resident LLC owners.

The PIR requires: LLC name and address, SOS (Secretary of State) file number, principal office address, principal place of business, registered agent information, and the names, titles, and addresses of all officers, directors, or managers. For member-managed LLCs, the names and addresses of all members must be disclosed.

Filing Deadlines

The franchise tax report and PIR are due on May 15 each year. If May 15 falls on a weekend or holiday, the deadline extends to the next business day. Texas allows a one-time automatic extension to November 15 by filing Form 05-164 and paying at least 90% of the estimated tax due by May 15. Late filing without an extension triggers penalties.

First-Year Filing

A newly formed Texas LLC does not file a franchise tax report in its first year. The first report is due on May 15 of the year following the LLC's formation. For example, an LLC formed in March 2025 files its first franchise tax report by May 15, 2026. The first report covers a short period from formation to December 31 of the formation year. Revenue is annualized to determine whether the no-tax-due threshold is exceeded.

How does Texas franchise tax apportionment work for multi-state LLCs?

Multi-state LLCs apportion their Texas franchise tax based on the ratio of Texas gross receipts to total gross receipts from all sources. Texas uses a single-factor apportionment formula based entirely on gross receipts sourced to Texas.

The apportionment formula is: Texas Gross Receipts / Total Gross Receipts from Everywhere = Apportionment Factor. The LLC multiplies its taxable margin by this apportionment factor to determine the portion of margin subject to Texas franchise tax.

For example, an LLC with $5 million in total revenue, $2 million of which comes from Texas customers, has an apportionment factor of 40% ($2M / $5M). If the LLC's taxable margin is $3 million, only $1.2 million ($3M x 40%) is subject to Texas franchise tax. At the 0.75% rate, the tax would be $9,000 instead of $22,500 on the full margin.

Sourcing Rules for Gross Receipts

Texas uses market-based sourcing to determine where gross receipts are generated. The rules vary by transaction type:

• Sale of tangible personal property: Sourced to Texas if the property is delivered or shipped to a Texas location.
• Services: Sourced to Texas if the service is performed in Texas or the customer receives the benefit of the service in Texas.
• Rentals and leases: Sourced to Texas if the property is located in Texas.
• Intangible property (royalties, licenses): Sourced to Texas if the intangible is used in Texas.

For digital services and SaaS companies, sourcing can be complex. Texas generally sources service revenue to the location where the customer receives the benefit. An LLC selling software subscriptions to Texas customers has those receipts sourced to Texas regardless of where the LLC is formed.

Throwback Rule

Texas has a throwback rule for sales of tangible personal property. If an LLC ships goods from Texas to a state where the LLC is not taxable, those receipts are "thrown back" to Texas and included in the Texas numerator. This rule can increase the apportionment factor and the Texas franchise tax for LLCs that ship goods from Texas warehouses to customers in states where the LLC has no nexus.

What happens if you fail to file or pay Texas franchise tax?

Failure to file the Texas franchise tax report results in escalating penalties, interest charges, and the potential forfeiture of the LLC's right to transact business in Texas. The Texas Comptroller enforces franchise tax compliance aggressively.

Late Filing Penalties

The Texas Comptroller imposes the following penalties for late franchise tax filings:

• 1-30 days late: 5% penalty on the tax due
• More than 30 days late: 10% penalty on the tax due
• No Tax Due Report filed late: $50 penalty per report

Interest accrues on unpaid franchise tax at a rate set quarterly by the Comptroller. The interest rate is typically based on the prime rate plus 1%. Interest begins accruing on the day after the due date and compounds until the tax is paid in full.

Forfeiture of LLC Charter

The Texas Secretary of State can forfeit an LLC's charter (terminate its right to exist as a legal entity) if the LLC fails to file franchise tax reports for three consecutive years. Before forfeiture, the Comptroller sends notices to the LLC's registered agent and last known address. After forfeiture, the LLC cannot legally conduct business, enter into contracts, file lawsuits, or maintain its name reservation in Texas.

Reinstating a forfeited LLC requires filing all delinquent franchise tax reports, paying all past-due taxes with penalties and interest, paying a reinstatement fee to the Secretary of State, and filing a certificate of reinstatement. The total cost of reinstatement often exceeds $1,000 and can take weeks to process.

Impact on Officers and Directors

Texas law imposes personal liability on officers and directors of an LLC that fails to file franchise tax reports. Under Texas Tax Code Section 171.255, each officer or director who fails to file the report is personally liable for a penalty of $200 per report. This personal liability survives even if the LLC is dissolved.

How does Texas compare to Wyoming for LLC formation?

Wyoming is superior to Texas for LLC formation on every major factor: lower costs, no franchise tax, stronger privacy protections, better asset protection, and simpler annual compliance. Texas costs more and requires more ongoing administrative work.

Formation Fees

Texas charges a $300 formation fee for filing a Certificate of Formation with the Texas Secretary of State. Wyoming charges $100 for filing Articles of Organization. The $200 savings on formation alone makes Wyoming the more affordable option from day one. Learn more about Wyoming LLC costs.

Annual Costs

Texas LLCs pay for franchise tax reporting compliance (accountant fees for preparation), the franchise tax itself if revenue exceeds $1.23 million, and no separate annual report fee. Wyoming LLCs pay only $60 per year for the annual report. There are no tax calculations, no margin computations, and no multi-form filing requirements. See the full breakdown at state fees comparison for LLCs.

Privacy

Texas requires public disclosure of all managers, officers, directors, and members through the Public Information Report (Form 05-102). This information is searchable on the Texas Comptroller's website. Wyoming does not require member names in public filings. Only the registered agent and organizer appear in Wyoming Secretary of State records. Learn about Wyoming LLC benefits.

Asset Protection

Wyoming provides charging order protection for both single-member and multi-member LLCs. A creditor cannot seize LLC assets, force distributions, or compel liquidation. Texas provides charging order protection for multi-member LLCs but does not explicitly extend this protection to single-member LLCs under Texas Business Organizations Code Section 101.112. Wyoming Statute §17-29-503 specifically protects single-member LLCs.

Full Comparison Table

For a deeper dive into every aspect of this comparison, read Wyoming vs Texas LLC: Full Comparison.

Why do non-residents avoid forming LLCs in Texas?

Non-residents avoid Texas LLC formation because of the franchise tax obligation, public disclosure requirements, higher formation costs, weaker single-member asset protection, and the complexity of annual franchise tax reporting from outside the United States.

Franchise Tax Creates Ongoing Obligations

Non-residents who form a Texas LLC must file franchise tax reports every year, even if they owe $0. This requires understanding Texas tax forms, tracking revenue thresholds, and potentially hiring a US accountant familiar with Texas franchise tax rules. Wyoming's $60 annual report is a simple online form that takes minutes to complete without professional assistance.

Public Disclosure Risks

Texas requires disclosure of all LLC managers and members in the Public Information Report. For non-residents who value privacy for personal security, competitive reasons, or cultural norms in their home country, this public disclosure is a dealbreaker. Wyoming keeps member identities out of public records entirely.

No International Banking Advantages

Texas offers no banking advantages over Wyoming for non-residents. Mercury Bank, Relay Bank, and Wise Business accept Wyoming LLCs from non-residents. The same banks accept Texas LLCs. The state of formation does not affect banking access, so there is no reason to choose Texas's higher-cost, more complex structure. Read the full guide on best states for non-resident LLCs.

Higher Total Cost of Ownership

A non-resident Texas LLC owner pays $300 to form the LLC, annual accountant fees ($200-$500) for franchise tax preparation, potential franchise tax liability as revenue grows, and registered agent fees. A non-resident Wyoming LLC owner pays $100 to form the LLC, $60/year for the annual report, and registered agent fees. The Wyoming total is consistently lower in every scenario.

Stripe and Payment Processing Are Identical

US Stripe accounts work the same regardless of whether the LLC is formed in Texas or Wyoming. Both states provide a valid US business entity for Stripe registration. Processing rates are 2.9% + $0.30 for both. There is no Stripe advantage to forming in Texas.

What does a Texas LLC cost over 5 years compared to Wyoming?

A Texas LLC costs approximately $1,800 to $3,500+ over 5 years when including formation fees, registered agent costs, franchise tax preparation, and potential franchise tax liability. A Wyoming LLC costs approximately $460 to $700 over the same period.

Texas LLC 5-Year Cost Breakdown

Wyoming LLC 5-Year Cost Breakdown

Revenue Growth Scenarios

The cost difference between Texas and Wyoming grows dramatically as LLC revenue increases. Consider three revenue scenarios over 5 years:

The savings become especially significant for growing businesses. A non-resident running a SaaS company that scales past $2 million in revenue saves thousands of dollars annually by forming in Wyoming instead of Texas. See the detailed cost breakdown at Wyoming LLC cost guide.

Which state is the best choice for your LLC?

Wyoming is the best choice for non-residents and most remote businesses because it combines the lowest formation costs, zero franchise tax, maximum privacy, and the strongest single-member asset protection in the United States.

Choose Texas LLC If

• Your business has physical operations, employees, or a warehouse in Texas
• You plan to enter into Texas government contracts that require a Texas entity
• You have an existing Texas business presence that requires local entity registration
• Your LLC will always remain well below the $1.23 million threshold and you are a Texas resident

Choose Wyoming LLC If

• You are a non-US resident forming a US LLC for the first time
• You want to avoid franchise tax entirely, at any revenue level
• Privacy is important and you do not want member names in public records
• You need single-member LLC asset protection (charging order protection)
• You want the simplest possible annual compliance (one $60 report)
• You operate a remote business with no physical presence in any specific state
• Your business revenue is growing and you want predictable state costs

What Non-Residents Should Do

Non-residents who have no physical presence in Texas should form a Wyoming LLC. The formation takes 1-3 business days online and costs $100. The annual compliance burden is a single $60 report filed on the anniversary of formation. There are no tax calculations, no margin deductions, no PIR filings, and no franchise tax risk as revenue grows. Wyoming provides a stable, predictable, and private business environment that non-residents rely on worldwide.

For a complete comparison of all states for non-resident LLC formation, read Best State for Non-Resident LLC Formation.