By Jake Lawson, LLC Formation Strategist
Let me start with the news that’ll make most of you happy: if your Texas LLC makes less than $2.47 million annually, you don’t owe franchise tax. That covers about 95% of the LLCs I work with.
But here’s what trips people up: even if you don’t owe franchise tax, you still have compliance obligations. And if you DO cross that $2.47 million threshold, Texas franchise tax becomes one of the more complex business taxes you’ll encounter.
After helping hundreds of Texas entrepreneurs navigate this system—from startups filing their first questionnaire to multi-million dollar LLCs dealing with complex calculations—I can tell you the key is understanding exactly where your LLC fits in Texas’s franchise tax world.
Let me break down everything you need to know, including the common mistakes that can cost you big money.
Texas Franchise Tax: The Big Picture
Texas doesn’t have a state income tax, so they make up for it with franchise tax on larger businesses. Think of it as Texas’s way of saying: “If you’re making serious money in our state, you’re going to contribute to the state coffers.”
The current threshold: $2.47 million in annual gross receipts
Who this affects: Large LLCs, established businesses, high-revenue companies
Who it doesn’t affect: Most small businesses, startups, side hustles
But here’s the catch: every Texas LLC has to interact with the franchise tax system, even if you don’t owe any tax.
Gross Receipts vs. Net Income: Understanding the Threshold
When Texas says “$2.47 million,” they mean
gross receipts—total revenue before expenses. This catches some business owners off guard.
Example: Your LLC brings in $2.6 million in revenue but has $2.5 million in expenses (net income of $100k). You’re still over the threshold because gross receipts are $2.6 million.
Real-world impact: I’ve seen profitable LLCs with modest net income get surprised by franchise tax obligations because they focused on profit margins instead of gross revenue.
Do You Need to File a Franchise Tax Return?
This is where it gets specific:
If Your LLC Makes LESS Than $2.47 Million Annually:
- ✅ Required: File Public Information Report (PIR) by May 15th
- ❌ Not required: Franchise Tax Return
- ❌ Not required: Franchise tax payment
- ✅ Still required: Complete initial Franchise Tax Questionnaire
If Your LLC Makes MORE Than $2.47 Million Annually:
- ✅ Required: File Franchise Tax Return by May 15th
- ✅ Required: Pay franchise tax owed
- ✅ Required: File Public Information Report (PIR) by May 15th
- ✅ Required: Complete initial Franchise Tax Questionnaire
Jake’s reality check: The questionnaire is mandatory for ALL Texas LLCs, regardless of size. Skip it, and you’ll have compliance problems later.
Timeline for New Texas LLCs
Understanding when your obligations kick in is crucial:
Year 1 (Formation year): Complete Franchise Tax Questionnaire within reasonable time after receiving welcome letter
Year 2 (First filing year): File PIR by May 15th (and Franchise Tax Return if over threshold)
Example: LLC approved in March 2025
- 2025: Complete questionnaire
- May 15, 2026: First PIR due (and first franchise tax return if applicable)
Important: Your first franchise tax return covers the period from formation through December 31st of the first year.
Texas Franchise Tax Rates and Calculations
If your LLC is over the $2.47 million threshold, here’s how Texas calculates what you owe:
Tax Rate Structure
Wholesale/Retail businesses: 0.375% of taxable margin
All other businesses: 0.75% of taxable margin
EZ computation method: 0.331% of total revenue
What “taxable margin” means: Basically your total revenue minus allowable deductions. The calculation can get complex quickly.
The SIC/NAICS Code Trap
Here’s a mistake that costs LLCs money: if you qualify for the lower wholesale/retail rate (0.375%) but don’t properly identify your business type, you’ll pay the higher rate (0.75%).
You identify your business type using Standard Industrial Classification (SIC) and North American Industry Classification System (NAICS) codes. Get these wrong, and Texas assumes you’re in the higher tax category.
Pro tip: If you’re in wholesale or retail, make absolutely sure your SIC and NAICS codes reflect that. The savings can be substantial on large revenue numbers.
The Franchise Tax Questionnaire Process
Every new Texas LLC must complete this questionnaire—it’s how Texas determines your ongoing compliance obligations.
How the Process Works
- LLC formation approved by Secretary of State
- Welcome letter arrives 2-3 weeks later with FQ number
- Complete questionnaire using FQ number
- Texas issues XT number for ongoing filings
- Annual report reminders sent before May 15th deadline
What the Questionnaire Asks
The questionnaire wants to know:
- Basic LLC information (name, address, formation date)
- Business activity description
- Expected revenue levels
- Ownership structure basics
- Contact information for tax matters
Time investment: Most LLCs can complete it in 15-30 minutes
Deadline: No specific deadline, but don’t wait months
Penalties for Non-Compliance: This Gets Serious
Texas doesn’t mess around with franchise tax compliance. Miss your obligations, and the consequences escalate quickly:
Administrative Penalties
- Late filing fees: Vary based on amount owed and how late you are
- Interest charges: Accumulate monthly on unpaid amounts
- Penalty assessments: Additional percentage-based penalties
Business Operational Consequences
- Loss of good standing: Your LLC loses its right to transact business
- Court access denied: Can’t sue or defend in Texas courts
- Contract restrictions: Can’t get contracts with state agencies
- License/permit blocks: State agencies won’t issue new permits or licenses
Personal Liability Risks
This is the big one: LLC members and managers can become personally liable for the LLC’s debts and taxes owed to the state.
This pierces your LLC’s liability protection—exactly what you formed the LLC to avoid.
The 45-Day Grace Period
Texas law requires a 45-day grace period after they send a “Notice of Intent to Forfeit Right to Transact Business.” Use this time wisely—after those 45 days, all the above consequences kick in.
Exemptions and Special Situations
Veteran-Owned LLCs
Texas offers significant benefits for qualifying veteran-owned LLCs:
- 5-year exemption from franchise tax
- 5-year exemption from Public Information Reports
- Must be formed between 1/1/2022 and 12/31/2025
- Must be veteran-qualified with both Secretary of State and Comptroller
This is a genuinely valuable benefit—take advantage if you qualify.
Other Exemptions
Certain entity types are completely exempt:
- Sole proprietorships
- General partnerships
- Passive entities (specific legal definition)
- Certain non-profits and religious organizations
Note: LLCs taxed as partnerships or sole proprietorships for federal purposes still owe Texas franchise tax if over the threshold.
Filing Methods and Deadlines
Annual Deadline: May 15th
Every year, no exceptions. Unlike some states that give you until your anniversary date, Texas wants everything by May 15th.
Late filings: Start accruing penalties immediately
Extension options: Limited—don’t count on getting extra time
Reminder System
Texas sends reminder notices between January and March:
- Email reminders: If they have your email on file
- Mailed reminders: If no email available
- Contains your XT number: You’ll need this for filing
Jake’s tip: Don’t rely on reminders. Set your own calendar alerts for March 1st to start preparing.
When to Hire Professional Help
Franchise tax calculations can get genuinely complex. Consider professional help if:
Definitely hire help for:
- Revenue over $5 million: Calculations become complex
- Multiple business activities: Apportionment rules apply
- Multi-state operations: Revenue allocation between states
- Complex ownership structures: Combined reporting requirements
- Cost of goods sold deductions: Manufacturing, wholesale, retail businesses
You might manage yourself if:
- Simple service business: Under the threshold, just filing PIR
- Straightforward operations: Single business activity, Texas-only
- Under $3 million revenue: Calculations are more manageable
What Professional Help Costs
- CPA or tax professional: $500-2,000 depending on complexity
- Franchise tax software: $200-500 for DIY options
- Bookkeeping services: Often include franchise tax as part of broader services
ROI consideration: Professional help often pays for itself through proper deductions and avoiding penalties.
Practical Compliance Strategies
Year-Round Preparation
Don’t wait until April to start thinking about franchise tax. Keep these records throughout the year:
- Monthly revenue totals
- Cost of goods sold calculations
- Employee compensation records
- Multi-state revenue allocation
- Business activity documentation
Technology Solutions
Use accounting software that can generate franchise tax reports:
- QuickBooks Enterprise (with Texas franchise tax features)
- Other business accounting platforms with Texas-specific modules
- Spreadsheet templates for simpler businesses
Professional Relationships
Build relationships before you need them:
- Find a CPA familiar with Texas franchise tax
- Understand their availability during tax season
- Establish processes for information sharing
Common Texas Franchise Tax Mistakes
1. Ignoring the questionnaire: Required for all LLCs, not just those owing tax
2. Missing the SIC/NAICS codes: Can cost retail/wholesale businesses money
3. Confusing gross receipts with net income: The threshold is total revenue
4. Forgetting about the PIR: Required even if you don’t owe franchise tax
5. Not planning for growth: Suddenly crossing the threshold creates obligations
6. Mixing up filing deadlines: May 15th for franchise tax, varies for other Texas requirements
Planning for Growth: Crossing the Threshold
What happens when your LLC grows from $2.3 million to $2.7 million in annual revenue?
Suddenly You Owe Franchise Tax
- No transition period: You immediately owe franchise tax
- Full year calculation: Based on the entire year’s revenue
- Quarterly estimated payments: Might be required for large amounts
Preparation Strategies
If you’re approaching the threshold:
- Start tracking the additional information needed for franchise tax calculations
- Establish relationships with qualified tax professionals
- Understand your business’s specific tax rate category
- Plan cash flow for tax payments
Multi-State Operations and Apportionment
If your Texas LLC operates in multiple states, franchise tax gets more complex:
Revenue Apportionment
Texas only taxes the portion of your revenue “apportioned” to Texas based on:
- Location of sales
- Property locations
- Payroll locations
- Business activity concentration
Combined Reporting
Large businesses might need to include related entities in their franchise tax calculations.
When this applies: Complex ownership structures, multiple related LLCs, certain revenue thresholds
Why it matters: Can significantly affect tax calculations
The Bottom Line on Texas Franchise Tax
For most Texas LLCs, franchise tax is more about compliance paperwork than actual tax payments. But don’t let that fool you into ignoring the requirements.
Key takeaways:
- Complete the questionnaire: Required for all LLCs
- File your PIR annually: Due May 15th regardless of revenue
- Plan for growth: Crossing $2.47 million creates new obligations
- Get professional help: When calculations become complex
- Don’t ignore compliance: Penalties can be severe
The Texas Comptroller’s office is generally reasonable to work with, but they expect businesses to meet their obligations on time. Stay organized, meet your deadlines, and seek help when you need it.
Your Texas Franchise Tax Action Plan
For LLCs under $2.47 million:
- Complete your Franchise Tax Questionnaire when you receive it
- Set annual reminders for PIR filing by May 15th
- Track revenue growth toward the threshold
- Maintain basic business records
For LLCs over $2.47 million:
- Establish relationship with qualified tax professional
- Implement monthly revenue and expense tracking
- Understand your business’s specific tax rate category
- Plan cash flow for quarterly estimated payments
- Set up systems for complex calculations and deductions
Need Help with Texas Franchise Tax Compliance?
Texas franchise tax can be straightforward for smaller LLCs but becomes genuinely complex as your business grows. Whether you’re filing your first questionnaire or dealing with multi-million dollar calculations, having the right guidance makes all the difference.
At llciyo.com, we’ve helped hundreds of Texas entrepreneurs understand their franchise tax obligations and develop compliance strategies that work for their specific situations.
Questions about your franchise tax requirements? Every business situation is unique, and sometimes you need personalized guidance to make sure you’re handling everything correctly and efficiently.
Growing toward the franchise tax threshold? We can help you prepare for the additional obligations and connect you with qualified professionals who specialize in Texas franchise tax calculations.
Remember: This guide provides general information about Texas franchise tax but doesn’t constitute tax advice. Franchise tax calculations can be complex and specific to your business situation. For detailed tax planning or complex compliance situations, consult with a qualified CPA or tax professional experienced with Texas franchise tax.