Choosing where to incorporate your business just got more expensive. While states like Delaware and Texas collect hundreds of millions in franchise taxes, charging companies for the right to exist, 14 states take a different approach, funding their operations without taxing your entity's mere existence.
The savings can be substantial. A growing SaaS company might pay Delaware $75,000 annually in franchise tax while paying $0 in Wyoming for similar legal protections. But “no franchise tax” doesn't mean “no taxes at all,” as each state finds alternative ways to fund operations, from gross receipts taxes to higher sales taxes, and the real costs can surprise you.
Your home state grants a franchise (the legal right to exist and do business) when you form a corporation or LLC. A franchise tax is what you pay for this privilege. It affects your company, not you personally, and applies whether you made a profit or lost money all year. Even cash-burning startups still owe franchise tax just for existing. That's why many laws call it a "privilege tax."
Since the tax targets existence rather than profits, it's fundamentally different from corporate income tax. Corporate income tax only kicks in when you show profit, while franchise tax is due no matter what.
States call similar charges corporate excise, business privilege, or minimum taxes, but the concept remains the same. Whether you get an Alabama notice for "business privilege tax" or a Tennessee bill for "corporate excise tax," you're paying for the right to do business, not the money you made.
A franchise tax doesn't target franchise businesses, nor does it replace income tax (many states collect both). The only constant: if your entity is chartered or operating in a franchise-tax state, you pay the fee simply for existing there.
You actually have plenty of options if you're looking to avoid an annual franchise tax bill. As of 2025, the states below either never imposed a franchise tax or have eliminated it completely.
Just remember, each state still collects revenue somehow, so consider the complete picture before choosing a home base.
Though Oregon doesn’t call it a “franchise tax,” its corporate excise tax is a privilege tax for doing business in the state.
Three patterns stand out:
The key point: a zero franchise tax certificate won't free you from corporate income, gross receipts, sales, or employment taxes. Calculate the numbers for your specific revenue model before celebrating.
Two states show why the franchise tax landscape keeps changing:
Lawmakers approved a phase-out completed with the 2024 tax year, replacing the old 0.125% asset-based tax with higher sales and gross production taxes. Local accountants report that the change mostly benefits capital-intensive companies that previously paid six-figure franchise bills.
The state scrapped its corporate franchise tax back in 2015, while also gradually reducing business property taxes. Within three years, the Secretary of State saw a clear increase in new in-state LLC filings, particularly from small service firms that had previously organized elsewhere to avoid the tax.
The trend clearly favors repeal. Lawmakers in Louisiana and Mississippi have proposed similar bills in recent sessions, betting that removing the franchise tax will attract new entities and, eventually, broader payroll and sales-tax growth.
If your business is asset-heavy or runs on thin margins, watch these debates closely. The next state to drop the tax could save you real money.
No franchise tax doesn't mean tax-free. Each no-franchise-tax state still needs revenue, and they use four very different approaches. Understanding how these systems work and who benefits most will help you find the right fit for your company.
Alaska, Florida, and Montana simply replace "franchise" with "income." Alaska funds much of its budget with oil royalties, but also charges a traditional corporate income tax that increases with profit, so you only pay when you're profitable. Florida takes a similar approach with a flat 5.5% rate on net income, while Montana uses a graduated schedule.
If your margins are solid and you value expense and loss deductions, these states will feel familiar, as your accountant can balance bad years against good ones just like on your federal return.
Washington's Business & Occupation (B&O) tax takes a slice of every dollar you collect, with rates reaching 1.5% depending on your industry. Ohio's Commercial Activity Tax (CAT) is milder at 0.26% on receipts above $1 million, but it still hurts low-margin operations since deductions aren't allowed.
If you run a SaaS business with 80% margins, a receipt-based tax might be painless. If you sell groceries at 5% margins, every fraction of a percent matters.
South Dakota and Wyoming have no franchise tax, no corporate income tax, and no gross-receipts tax. You'll still pay sales, property, and employment taxes, but your entity-level cost is basically just the annual report fee.
Asset-holding companies, real-estate funds, and similar structures that generate little in-state revenue but hold significant value often choose these states for exactly this reason.
New Hampshire offers a unique hybrid approach. Its Business Enterprise Tax hits compensation, interest, and dividends at 0.55%, while the Business Profits Tax takes 7.5% from net income.
This split lets early startups keep their BET bill small during initial, payroll-heavy years, yet the state still shares in success once profits appear.
If your cash flow varies widely, corporate income tax states give you room to breathe during downturns. High-margin, low-expense operations can often handle a gross-receipts formula with minimal pain. Asset-heavy entities looking for maximum tax efficiency gravitate toward South Dakota or Wyoming.
If your payroll dwarfs your profits, New Hampshire's hybrid might be ideal. Match the tax structure, not just the rate, to how your business actually makes money, and dropping the franchise tax becomes one piece of a smarter overall strategy.
Picking a state just because it has no franchise tax seems like an easy win, but several factors matter more than tax savings for many businesses.
Delaware's Court of Chancery specializes in business disputes and has a centuries-long history of precedents, which reduces legal uncertainty that venture capital firms value. No-franchise-tax states like Wyoming and Nevada offer strong asset protection but lack deep case law. If you anticipate investor disputes, complex M&A, or major equity rounds, Delaware's legal framework often justifies its franchise tax costs.
When Delaware's franchise tax makes sense:
When no-franchise-tax states make more sense:
Every state requires annual reports and registered agents. Nevada's privacy protections increase agent costs, while some states impose steep penalties for missing deadlines by a single day. Calculate total compliance costs, not just franchise tax.
Incorporating in Wyoming but selling primarily in California forces foreign registration, California's $800 minimum franchise tax, and double compliance costs. Apportionment rules typically allocate most income to high-tax states, erasing initial savings.
Match incentives to your sector: Wyoming offers R&D credits for tech companies, while Alaska provides natural resource incentives but little for software firms. Additionally, gross receipts taxes in Washington or Texas can exceed any franchise tax you avoided.
Choosing a no-franchise-tax state for formation requires strategic tax planning. And once you've made that choice, the ongoing compliance burden from annual reports to registered agent requirements can quickly overwhelm your administrative capacity, especially as you expand into multiple states.
Discern eliminates this complexity by automating your compliance across all 51 jurisdictions, whether you're incorporated in Wyoming or Delaware. Our platform:
And if you expand from your no-franchise-tax home state into California, Texas, or New York, Discern ensures you never miss the foreign qualification requirements and ongoing compliance obligations that come with multi-state growth. Ready to automate your compliance strategy? Book a demo with Discern today.
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