Franchise Tax – Taxable Entities

1. What entities are subject to the franchise tax?
The revised franchise tax applies to partnerships (general, limited and limited liability), corporations, LLCs, business trusts, professional associations, business associations, joint ventures and other legal entities. TTC 171.0002.
2. What entities are not subject to the revised franchise tax?
The revised franchise tax does not apply to:

  • sole proprietorships (except the tax does apply to single member LLCs filing as a sole proprietor for federal income tax purposes);
  • general partnerships directly and solely owned by natural persons (except the tax does apply to all limited liability partnerships);
  • entities exempt under Subchapter B of Chapter 171; and
  • passive entities (as defined under TTC 171.0003).
3. Is a general partnership whose partners consist of natural persons a taxable entity?
A general partnership directly and entirely owned by natural persons is not a taxable entity. TTC 171.0002(b)(2).
4. Is a general partnership owned directly and entirely by natural persons that elects limited liability status a taxable entity?
Yes, even if a general partnership is composed entirely of natural persons, if it elects limited liability status it is a taxable entity. TTC 171.0002(b)(2).
5. Is a general partnership whose partners consists of natural persons and one general partnership a taxable entity?
Yes, a general partnership must be composed directly and entirely of natural persons to be a non-taxable entity. TTC 171.0002(b)(2).
6. Will an estate of a deceased partner involved in a general partnership make a general partnership made up of natural persons subject to franchise tax?
No, a general partnership composed entirely of natural persons will not become a taxable entity because of the estate of a deceased partner. TTC 171.0002(c)(2). (Updated 07/21/10)
7. Is a limited partnership whose partners consist of natural persons a taxable entity?
Yes, to qualify as a non-taxable entity, the partnership must be a general partnership. TTC 171.0002(b).
8. 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.
9. 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).
10. What is a natural person?
A natural person is a human being as distinguished from a purely legal entity given recognition as the possessor of rights, privilege, and responsibilities, such as a corporation, limited liability company, partnership or trust. TTC 171.0001(11-a).
11. Are passive entities taxable entities?
A passive entity as defined by TTC 171.0003 is not a taxable entity. TTC 171.0002(b)(3). (See FAQ#8 under Passive Entities Rule 3.582 for possible reporting requirements.)
12. 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 non-taxable entity. (Updated 07/21/10)
13. The taxpayer is a disregarded entity for federal purposes. Do they have to file franchise tax if they have nexus in Texas?
Yes. The determination of responsibility for Texas franchise tax is based on the legal formation of an entity. An entity’s treatment for federal income tax purposes does not determine its 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. The entity is required to file a separate franchise tax report unless it is a member of a combined group. If the entity is a member of a combined group, the reporting entity may include the disregarded entity with the parent’s information; in that event, both entities are presumed to have nexus. (Updated 04/10/08)
14. Is a limited liability company that was set up to collect lottery winnings subject to the franchise tax?
Yes; a limited liability company that is organized in Texas or is doing business in Texas is subject to the franchise tax. (Updated 06/19/08)
15. Are trusts subject to the franchise tax?
Yes; unless the trust falls under one of the statutory exclusions in TTC 171.0002(c) as a non-taxable entity, it is a taxable entity. (Updated 06/19/08)
16. Is a joint venture wholly owned by natural persons a taxable entity?
No; a joint venture that is wholly and directly owned by natural persons is not a taxable entity. (Updated 06/19/08)
17. Is a partnership with an IRA as a partner a taxable entity?
If an IRA is a partner in a partnership, then the partnership is a taxable entity. (Updated 07/21/10)