NC Franchise Tax: Everything You Need to Know
NC franchise tax is a tax placed on companies for the privilege of doing business in North Carolina. 3 min read
NC franchise tax is a tax placed on companies for the privilege of doing business in North Carolina. It applies to corporations and S corporations and is a tax on a business's net worth. C corporations in the state are subject to other types of taxes.
North Carolina's State Income Taxes
Most states impose some kind of tax on business income. In general, the specific taxes imposed on a business depend in part on its legal structure. States charge franchise taxes either based on a company's net worth or as a flat fee.
In most jurisdictions, corporations are subject to corporate tax, while “pass-through entities” — such as LLCs, partnerships, S corps, and sole proprietorships — are subject to state tax on personal income.
Tax rates vary widely from one state to another, which is true for personal and corporate tax rates. Corporate rates tend to be flat no matter the business income. They typically range from four to nine percent. Personal rates, which usually vary based on the amount of personal income, may range from zero to around nine percent or higher in some states.
The corporate income tax rate in North Carolina is four percent of net income.
In addition to these personal or corporate taxes, many states charge a separate tax on certain business types. These are usually called a franchise or privilege tax and are charged for the right or “privilege” of conducting business there.
Starting in 2016, the minimum franchise tax in North Carolina is $200. The rate is $1.50 per $1,000 of a corporation's net worth. There's no maximum on the tax except for qualified holding companies. For composite filers, the corporate tax rate is based on the individual's current income tax rate.
North Carolina imposes a corporate income tax on traditional corporations, which are also known as C corps. The state also imposes a franchise tax that applies to traditional corporations and S corporations.
If your business income passes directly to you, you must pay taxes on it via your personal state tax return.
Taxes for Different Business Structures
The five most common business types in North Carolina are:
Corporations in North Carolina are subject to the state's corporate income tax as well as the franchise tax.
S corporations are formed by starting a traditional corporation first. Then, the business files to elect special "S" status with the IRS. S corps, unlike C corps, are generally not subject to separate federal income tax. Instead, in an S corp, taxable income passes through to the individual shareholders or owners. Each shareholder pays their share of federal income tax based on the share of corporate income.
North Carolina recognizes S corp election, and S corps in the state are not subject to the corporate tax rate. However, S corps are still required to pay franchise taxes. In addition, each shareholder in an S corp owes taxes on their share of the S corp's income.
Like S corps, limited liability companies are pass-through entities. In general, an LLC does not pay income tax to the state or federal government. Instead, business income is distributed to the individual owners or members in the LLC. They pay state and federal taxes on the amount of income they receive.
LLCs are classified by default as partnerships (or, in the case of single-member LLCs, as “disregarded entities”), but you may choose to have your LLC classified as a corporation. If you make that decision, your LLC will be subject to franchise and corporate income taxes.
Income from partnerships goes to individual partners who pay taxes on the amount that they receive. They pay both state and federal taxes on this income. In a sole proprietorship, business income goes to the proprietor. They pay state taxes on that income.
Staying current with your taxes is just one thing business owners must do to stay compliant. If you are unsure of the taxes you are responsible for in North Carolina, you may either consult with a tax professional or refer to the information at the Secretary of State website.
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