The DC Unincorporated Business Franchise Tax is imposed on certain businesses operating in the District with gross receipts of $12,000 or greater. The tax applies to LLC, partnerships, S-Corps and certain individuals and is filed on Form D-30. Taxpayers are subject to tax at a rate of 9.2% on net profits. However, most self employed consultants are exempt from the tax if 80 percent of gross income is derived from personal services rendered by the members of the entity and capital is not a material income-producing factor. Thus many self-employed individuals are able to escape Franchise Tax as if they were being paid wages.
Corporations (both domestic and foreign) are subject to Franchise Tax based on a single sales factor and market source rules. This recent change was intended to increase the tax base as D.C. lowers its Franchise Tax Rate. However, many Corporations are arguably over paying their Franchise Tax as they may have foreign source contracts that appeal to markets outside of the District.
Before establishing your choice of business entity, you should consult a District of Columbia Business Franchise Tax Attorney to evaluation your options and tax liability, particularly if you reside outside the District.