taxes

Franchise Tax Frequently Asked Questions

Taxable Entities

What is a natural person?

Natural person means a human being or the estate of a human being. The term does not include a purely legal entity given recognition as the possessor of rights, privileges and responsibilities, such as a corporation, limited liability company, partnership or trust. Texas Tax Code (TTC) 171.0001(11-a).

Are family limited partnerships subject to the franchise tax?

A family limited partnership is a taxable entity unless it meets the criteria of a passive entity under TTC 171.0003.

Are sole proprietorships subject to the franchise tax?

A sole proprietorship that is not legally organized in a manner that limits its liability is not a taxable entity. A single-member limited liability company filing as a sole proprietor for federal income tax purposes is a taxable entity. TTC 171.0002(d).

Is a non-Texas entity that owns a royalty interest in an oil or gas well in Texas subject to the franchise tax?

Yes. A royalty interest in an oil or gas well is considered an interest in real property. Therefore, a non-Texas entity that owns a royalty interest in an oil or gas well in Texas is considered to own real property in Texas and is subject to the franchise tax unless it is a nontaxable entity.

The taxpayer is a disregarded entity for federal purposes. If such a taxpayer has nexus in Texas, does the taxpayer have a Texas franchise tax filing responsibility?

Yes. The legal formation of an entity – not an entity's treatment for federal income tax purposes – determines filing responsibility for Texas franchise tax. Therefore, each taxable entity that is organized in Texas or doing business in Texas is subject to franchise tax, even if it is treated as a disregarded entity for federal income tax purposes and is required to file a franchise tax report. If the entity files as a member of a combined group, the reporting entity may include the disregarded entity with the parent's information; in that event, both the disregarded entity and its parent are presumed to have nexus.

Are grantor trusts subject to the franchise tax?

Yes, unless the grantor trust qualifies as a passive entity or as a nontaxable entity under TTC 171.0002(c)(1). This subsection states that a grantor trust qualifies as a nontaxable entity if:

  • all of the grantors and beneficiaries are natural persons or charitable entities and
  • it is not a trust taxable as a business entity pursuant to IRS Treasury Regulation Section 301.7701-4(b).
How does a series limited liability company (LLC) report its activities for franchise tax?

A series LLC is treated as a single legal entity. It pays one filing fee and registers as one entity with the Texas Secretary of State. It files one franchise tax report and one Public Information Report as a single entity, not as a combined group, under its Texas taxpayer identification number. If one of the series has nexus in Texas, the entire series LLC has nexus in Texas.