If you’ve formed an LLC but haven’t done business this year, you may be wondering if you need to pay the Delaware franchise tax. Here’s what you need to know.
What Happens If I Don’t Pay the Delaware Franchise Tax?
If a company fails to pay franchise tax, it will eventually lose its good standing status. When an LLC loses good standing status, it also loses its limited liability protections. This exposes members to personal liability they would otherwise not have if they paid franchise tax on time.
In addition to losing liability protection, failing to pay franchise tax can also incur additional costs. If an LLC does not pay franchise tax for 3 years, the Secretary of State will declare the company void. When this happens, members have to undergo a costly process of filing a Renewal and Revival to reinstate the LLC.
What Is the Delaware Franchise Tax, Again?
Franchise “Tax” is often misinterpreted to mean that the fee will be calculated based on profits or capitalization, but that is not the case with Delaware LLC franchise tax. It is considered a flat “maintenance fee” for the privilege of having the legal protections of an LLC in Delaware. The State of Delaware requires every LLC that is registered in the state to pay a flat fee of $300 each year to remain in Good Standing, regardless of business activity.
How Much Is the Delaware Franchise Tax?
All LLCs, Limited Partnerships, and General Partnerships formed or registered in Delaware are required to pay an annual franchise tax. The $300 payment is due on June 1 of each year after formation. This is a flat fee that is not calculated based on company revenue.
Delaware corporations are required to file an annual report and pay franchise tax by March 1 each year. The minimum corporate franchise tax is $175 using the default Authorized Shares Method and can increase if the corporation has a large number of authorized shares. The Assumed Par Value Capital Method can be used to calculate corporate franchise tax and starts at $400.00. Assumed Par Value method may lower franchise tax for those corporations with a large number of authorized shares and/or shares with a higher par value.
Nonprofit 501(c)(3) organizations and other exempt domestic corporations owe $25 each year on March 1.
The late fees for franchise tax are $200, plus 1.5% interest per month. This fee is assessed by the state automatically.
When Is the Delaware Franchise Tax Due for LLCs?
Franchise tax starts the year after you form your LLC. It is due on or before June 1 of every year. Failure to pay the tax will result in a $200 penalty in addition to the tax, plus interest and immediate loss of Good Standing status, so it’s important to pay the tax by the due date. You may also pay franchise tax for the year at any time before the tax is becomes due. If the LLC goes two years without paying state franchise tax, the company will automatically go void. The company will require a costly renewal/revival if the Members decide they want the business to continue under the same name. A renewal/revival is also the only way to keep the same formation date.
How Often Do I Need to Pay the Delaware Franchise Tax?
Franchise tax is due every year. As long is the LLC or corporation wishes to remain in good standing, it must pay franchise tax.
Do I Need to Pay the Delaware Franchise Tax If My LLC Didn’t Do Any Business?
Yes, franchise tax fees are a requirement by all Delaware LLCs regardless of their business activities. This is a fee charged by the state for the privilege of maintaining a business within its jurisdiction and keeps your company in good standing and not related to the annual revenue of the business.