In Texas, the franchise tax is owed by nearly every business entity that has a legal identity separate from its owners: corporations, LLCs, limited partnerships, limited liability partnerships, professional associations, business trusts, and similar entities formed in Texas or doing business here.1State of Texas. Texas Tax Code 171.0002 – Definition of Taxable Entity Sole proprietorships and general partnerships made up entirely of individual people are not taxed. And even among taxable entities, those with annualized total revenue at or below $2.65 million for the 2026 and 2027 report years owe no tax, though most still have a report to file.2Texas Comptroller. Franchise Tax
Entities That Owe the Tax
Texas uses the term “taxable entity” and defines it broadly. If your business has its own legal identity apart from you personally, it almost certainly qualifies. That covers:
- Corporations, including both C-corps and S-corps
- Limited liability companies (LLCs), single-member or multi-member
- Limited partnerships (LPs)
- Limited liability partnerships (LLPs)
- Professional corporations and professional associations
- Business trusts
- Joint ventures
Federal tax classification does not change the answer. An S-corp that passes all its income through to owners on its federal return is still a taxable entity in Texas.1State of Texas. Texas Tax Code 171.0002 – Definition of Taxable Entity An LLC taxed as a disregarded entity federally is still a taxable entity in Texas.
The obligation starts the moment the state recognizes the entity exists. A brand-new LLC that has not yet earned a dollar is a taxable entity from day one, and it has to stay current with the franchise tax system to keep its legal standing, even in years when it owes nothing. Treating the tax as something to worry about only after revenue starts flowing is one of the costliest mistakes small businesses make here.
Businesses That Are Exempt or Excluded
A handful of structures fall outside the franchise tax entirely.
Sole proprietorships. There is no separate entity to tax. The business and the individual are the same legal unit.
General partnerships made up entirely of natural persons. If every partner is a human being, the general partnership is excluded. If an LLC, trust, or corporation joins as a partner, the exclusion disappears immediately.1State of Texas. Texas Tax Code 171.0002 – Definition of Taxable Entity
Certain passive entities. An entity that gets at least 90 percent of its federal gross income from passive sources such as dividends, interest, and capital gains, and that keeps active-trade-or-business income at 10 percent or less, may qualify.
Nonprofits with federal tax-exempt status. Organizations holding 501(c)(3) or similar IRS recognition are generally relieved from the franchise tax.
Certain trusts. Grantor trusts, estate-related trusts, and some other trust structures can fall outside the definition of taxable entity.
Exempt status is not permanent. If ownership shifts, the exemption can disappear overnight. The classic trap is a general partnership that brings on a corporate or LLC partner and quietly becomes taxable without anyone noticing. Review your organizational documents whenever ownership changes.
Veteran-Owned Business Exemption
Texas offers a full franchise tax exemption for qualifying new veteran-owned businesses during their first five years. To qualify, the entity must be formed in Texas on or after January 1, 2022, be 100 percent owned by natural persons who are honorably discharged U.S. Armed Services veterans, and provide a letter of verification from the Texas Veterans Commission for each owner.3Texas Comptroller. New Veteran-Owned Businesses and Texas Franchise Tax During that five-year window, qualifying businesses owe no tax and are not required to file a Public Information Report or Ownership Information Report.
The No Tax Due Threshold
Even if your business is a taxable entity, you owe nothing in franchise tax if your annualized total revenue falls at or below the No Tax Due threshold. For the 2026 and 2027 report years, that threshold is $2,650,000.2Texas Comptroller. Franchise Tax The Texas Legislature doubled the previous threshold with Senate Bill 3 in 2023.4Texas Comptroller. No Tax Due Reporting for Report Year 2024 and Later
Being under the threshold does not mean you can ignore the Comptroller. Starting with the 2024 report year, entities below the threshold no longer file a No Tax Due Report, which was eliminated. But they are still required to file a Public Information Report (PIR) or an Ownership Information Report (OIR), depending on entity type.5Texas Comptroller. Texas Franchise Tax Report Forms for 2025 A tardy information report draws a $50 late-filing penalty even when zero tax is due,2Texas Comptroller. Franchise Tax and continued neglect leads to much worse.
Out-of-State Businesses With Texas Nexus
You don’t have to be incorporated in Texas to owe this tax. An out-of-state entity that has a sufficient connection, or nexus, with the state is pulled in.
Physical nexus exists if the company has a tangible presence in Texas: an office, warehouse, or distribution center; employees working in the state; agents, subcontractors, or independent sales representatives operating here; or inventory stored in a third-party fulfillment warehouse.6Texas Comptroller. Engaged in Business
Economic nexus has applied since January 2020. An out-of-state entity with $500,000 or more in annual gross receipts from business done in Texas owes the franchise tax, with or without any physical presence.7Texas Comptroller. Remote Sellers This reaches large e-commerce sellers, SaaS companies, and professional service firms that sell into Texas from other states.
Some out-of-state businesses assume Public Law 86-272 shields them because it blocks states from imposing a net income tax on companies whose only in-state activity is soliciting orders for tangible goods. It does not help here. The Comptroller treats the franchise tax as a margin-based tax rather than a net income tax, so P.L. 86-272 does not apply. A company whose only Texas presence is salespeople taking orders can still owe franchise tax if it crosses the revenue or physical presence lines.
What Happens If a Taxable Entity Ignores the Obligation
Why does it matter whether you’re on the list of who pays? Because the consequences of failing to file or pay reach beyond late fees.
After a report or payment becomes delinquent, the Comptroller sends a notice of forfeiture. If the entity does not file or pay within 45 days of that notice, the Comptroller forfeits the entity’s right to transact business in Texas.8State of Texas. Texas Tax Code Chapter 171 – Franchise Tax The Secretary of State changes the entity’s status from “in existence” to “forfeited existence.”9State of Texas – Secretary of State. The Involuntary Termination of a Business Entity
Two consequences follow that catch most owners off guard. A forfeited entity cannot sue or file a cross-claim in a Texas court. It can defend itself if sued, but it cannot bring an action to collect a debt, enforce a contract, or protect its interests. And each officer, director, or managerial official becomes personally liable for the entity’s debts as if a general partner, covering debts incurred from the date the report or tax was originally due until the entity’s privileges are revived.9State of Texas – Secretary of State. The Involuntary Termination of a Business Entity Reviving the entity later does not erase the personal liability that built up during the forfeiture period.
If the forfeiture is never resolved, the entity is eventually treated as terminated. A terminated entity survives for three years for the sole purpose of winding down and resolving existing claims, after which unresolved claims by or against it are extinguished.
The simplest way to stay out of this chain of events is to recognize whether your business is a taxable entity in the first place, file what the Comptroller requires every year by May 15, and do it even when your tax bill is zero.