The most common surprise in Texas business formation is the moment the founder realizes that “no state income tax” does not mean “no state entity tax.” Texas has a Franchise Tax, often called the margin tax, which applies to almost every business entity formed or doing business in the state. The amount most small Dallas businesses owe is zero, but the filing obligation is not, and the consequences of skipping the filing reach beyond the tax itself. The Secretary of State can forfeit a non-compliant entity’s right to do business, which means losing standing to sue in Texas courts and losing the liability shield of the LLC or corporate structure. A Dallas business law attorney advising a new entity at formation should walk through the Franchise Tax mechanics on the first call, and any existing business that has been treating the May 15 deadline as optional should reread the rules.
Here is what the tax actually is, what it costs, and what every Texas entity needs to file.
What the Franchise Tax Is and Who Pays It
The Texas Franchise Tax is imposed under Tax Code Chapter 171 on each “taxable entity” that is formed or organized in Texas, or that does business in Texas under the economic nexus standards. The tax applies regardless of whether the federal tax return shows a profit or a loss, because the base is “taxable margin” rather than net income.
Taxable entities include:
- Corporations (C-Corps and S-Corps both pay)
- Limited liability companies, including single-member LLCs taxed as disregarded entities
- Limited partnerships and limited liability partnerships
- Professional associations and professional limited liability companies
- Business trusts and certain other entities
Sole proprietorships and certain general partnerships directly owned by natural persons are excluded. The S-Corp election under federal law does not change Texas Franchise Tax treatment, which catches many founders off guard.
For Dallas businesses operating across state lines, the apportionment formula under Tax Code § 171.106 uses single-factor gross receipts. Only the portion of revenue attributable to Texas is subject to the tax.
The No-Tax-Due Threshold and Why It Does Not Eliminate Filing
For 2026 reports, an entity with annualized total revenue at or below $2,650,000 does not owe Franchise Tax. The threshold was $2,470,000 for 2024 and 2025 reports. The Comptroller adjusts the figure biennially under Tax Code § 171.006 based on inflation.
A common misunderstanding among small business owners is that being below the threshold means no filing obligation. Effective January 1, 2024, Texas eliminated the No Tax Due Report (Form 05-163) entirely, but entities below the threshold are still required to file either a Public Information Report (Form 05-102) for corporations, LLCs, limited partnerships, professional associations, and financial institutions, or an Ownership Information Report (Form 05-167) for all other entity types.
The PIR and OIR are not tax filings. They are public records that update the entity’s officers, directors, members, or owners, along with the registered agent information. The deadline is May 15, the same as the Franchise Tax report itself.
The penalty for late filing is real even when no tax is due. The Comptroller assesses a $50 penalty on each late report, and continued non-compliance can result in the Secretary of State forfeiting the entity’s registration. A forfeited LLC cannot maintain a lawsuit in Texas courts, cannot obtain a Certificate of Status, and may lose the liability protection that was the entire reason to form the LLC in the first place.
Four Methods to Calculate Taxable Margin
Entities above the no-tax-due threshold calculate their tax using the lowest of four methods authorized under Tax Code § 171.101. The math for each method on the same revenue figures usually produces materially different results.
70 percent of total revenue. The simplest calculation. An entity with $5 million in total revenue would have a taxable margin of $3.5 million under this method, regardless of expenses.
Total revenue minus cost of goods sold. Available to entities that produce, acquire, or sell tangible personal property in the ordinary course of business. The COGS deduction is calibrated to specific Texas rules in § 171.1012, which differ in important respects from federal COGS treatment.
Total revenue minus compensation. Compensation includes wages, cash compensation, and certain benefits paid to officers, directors, owners, and employees, capped at a per-person limit of $480,000 for 2026 reports. For service businesses with high payroll and modest other expenses, this method often produces the lowest taxable margin.
Total revenue minus a flat $1 million deduction. The simplest alternative for smaller businesses above the threshold but below the level where COGS or compensation deductions produce better outcomes.
A taxable margin can never exceed 70 percent of total revenue regardless of which calculation method is used. The 70 percent cap applies after the deduction.
The standard tax rate is 0.75 percent of taxable margin. Entities primarily engaged in retail or wholesale trade pay a reduced rate of 0.375 percent.
The EZ Computation Method
Entities with annualized total revenue of $20 million or less can elect the EZ Computation, which simplifies the math substantially. The calculation multiplies Texas-apportioned total revenue by a flat rate of 0.331 percent.
The EZ method has tradeoffs. EZ filers cannot use any of the four standard margin deductions, cannot claim Franchise Tax credits, and cannot carry forward business loss credits. For some businesses, EZ produces a higher tax than the standard methods would. For others, particularly service businesses with modest deductions and revenue between $2.65 million and $5 million, EZ produces both the lowest tax and the simplest filing.
Comparing both methods before electing is the right approach for any business near the threshold.
What a Dallas Business Law Attorney Watches in Compliance Practice
Several recurring issues catch Texas businesses off guard.
Annualization for short reporting periods. New entities filing their first Franchise Tax report often need to annualize total revenue if the reporting period covers less than 12 months. The annualized figure is what gets compared to the threshold, not the actual revenue earned during the partial period.
Combined reporting for related entities. Tax Code § 171.1014 requires unitary businesses to file as a combined group rather than separately. The combined group’s annualized total revenue is what determines the threshold, which can pull entities into Franchise Tax liability that would have been below the threshold standing alone.
Economic nexus for out-of-state businesses. Texas applies economic nexus standards that bring out-of-state businesses into the Franchise Tax regime if they meet specific thresholds for receipts derived from Texas. Many Dallas-area service providers and e-commerce sellers have Franchise Tax obligations they do not realize.
Final reports for closing entities. An entity ceasing to do business in Texas must file a Final Franchise Tax Report and obtain Franchise Tax clearance from the Comptroller before the entity can be terminated with the Secretary of State. Skipping the clearance process leaves the entity in a permanent forfeited status, with the directors, officers, or members potentially exposed to personal liability for entity obligations.
Public Information Report accuracy. The PIR is signed under penalty of law and identifies the entity’s officers, directors, and owners. Inaccurate PIR information has come up in litigation involving piercing-the-corporate-veil claims and successor liability disputes.
Practical Steps for Texas Businesses
A few specific moves keep Texas Franchise Tax compliance straightforward.
Calendar the May 15 filing deadline every year. Set the reminder at least 60 days before the deadline to allow time for accounting work and review.
For businesses near the threshold, run the calculation under EZ Computation and at least one standard method before filing. The savings on a $4 million revenue business can run several thousand dollars based on which method is elected.
Keep PIR and OIR information current with the actual ownership and management of the entity. Update mid-year when material changes occur.
For entities ceasing operations, file a Final Report and obtain Franchise Tax clearance before filing a Certificate of Termination with the Secretary of State. Closing the entity at the state level without tax clearance is a recurring source of problems for entrepreneurs years after they thought the business was wound down.
For multi-state operations or related entity structures, evaluate whether combined reporting applies and confirm that economic nexus has been properly analyzed.
When to Bring in a Dallas Business Law Attorney
The Franchise Tax itself is largely an accounting exercise, but the surrounding compliance issues, including entity formation choices, PIR accuracy, combined group analysis, dissolution and clearance processes, and the consequences of forfeited registration, sit at the intersection of corporate law and tax. A Dallas business law attorney working alongside a CPA can identify the structural issues that affect Franchise Tax exposure and ensure that the entity-level filings stay aligned with what the corporate records actually say.
The Mundaca Law Firm advises Dallas businesses on entity formation, ongoing corporate governance, and the broader business law issues that intersect with state tax compliance. If your business has approached or crossed the no-tax-due threshold, has multi-entity or multi-state operations, or has been treating the May 15 deadline as an afterthought, a compliance review now is significantly less expensive than the consequences of a forfeited registration.
