Delaware Franchise Tax is really important to maintain the Good Standing of a company in Delaware. The company’s liability shield is only in place when the company is currently in Good Standing. When a company falls behind on paying franchise tax and loses its Good Standing, the shield goes down. The company owners’ personal assets become to creditors of the company. This is where keeping current with the Delaware Franchise Tax comes in.
What Is the Delaware Franchise Tax?
Delaware law requires companies incorporated in Delaware to pay annual Delaware Franchise Tax. These payments are essentially “privilege fees” to keep a company in Good Standing. In the case of a corporation, you must also file a simple annual report online listing the directors to keep a corporation in Good Standing.
A company’s income is not a factor in the calculation of Delaware Franchise Tax. Even companies with no business activity must file the annual report and pay franchise tax to maintain Good Standing status.
Please understand that this is a fee for the privilege of keeping a Delaware company and the rights and protections that go with it. This is like paying “dues” for the privilege of being in a club. You pay the same no matter how much or little you use it. This prevents administrative dissolution. This has nothing to do with income or revenues.
(To pay your annual franchise tax now, please visit our sister site, Defrantax.com to file and pay your tax online. You can also call us at 1-800-759-2248 for help.)
Delaware LLC Tax: What You Need To Know.
If your Delaware LLC does not conduct business physically in the State of Delaware, you will likely not owe Delaware taxes. This includes Delaware state income tax. Delaware LLCs operating outside of Delaware are not even required to file Delaware tax returns.
Delaware LLCs however are required to pay the Delaware Annual Franchise Tax no matter where their operations are located. This is true even if a Delaware LLC does not have any income in a given year.
What Are the Delaware Franchise Tax Due Dates?
Delaware Corporations, Limited Liability Companies (LLCs), and Limited Partnerships (LPs) are required to pay the annual Delaware Franchise Tax. The Division of Corporations sends Delaware Companies franchise tax notices for the previous calendar year, not the current year, unless the company wants to dissolve, in which case they must also pay the current year prior to dissolution. This retroactive franchise tax can create a “gotcha” for corporations ambitious in authorizing a large number of shares and not careful with how many shares it issues. Therefore, if incorporated in Delaware, the corporation should have 5,000 or fewer authorized shares to minimize this annual franchise tax. Do not fall into this potential corporate tax trap by authorizing millions of shares and issuing a small number of shares. Fortunately, in the case of an LP and LLC there is no such trap because the annual franchise tax is a flat fee not formulated based on ownership interest calculations.
The franchise tax for Delaware Corporations, LLCs, and LPs is due once a year on a particular date:
Franchise tax for Delaware Corporations is due by March 1 each year. Corporations may pay the tax before March 1. The Division of Corporation will assess a $125 late fee, as well as a 1.5 percent monthly interest penalty to Delaware Corporations that do not pay on time. For a corporation with under 5,000 shares, the tax is $175 plus a $50 filing fee.
LLCs and LPs
Delaware LLC and LPs must pay an annual franchise tax to the State of Delaware by June 1. Like Delaware Corporations, LLCs, and LPs may pay early before June 1. The fee for LPs and LLCs is only $300 per year. Failure to pay on time will result in a $200 late fee and a 1.5 percent monthly interest penalty.
Again, all Delaware LLCs and LPs owe an annual franchise tax of $300. This is a flat fee for all LLCs and LPs, making the tax simple to budget. It is a small price to pay for the benefits afforded to you under Delaware law.
What Is the Delaware Corporation Franchise Tax and the Annual Report?
The Delaware Franchise Tax for corporations depends on the number of authorized shares of stock in the Certificate of Incorporation.
Corporations must file an annual report listing all directors’ names and addresses as of the date of filing and pay a small annual report filing fee in addition to the franchise tax. The electronic signature on this filing is under threat of perjury.
The amount of the Delaware Franchise Tax fee depends on the number of shares the corporation has. The Division of Corporations considers corporations with 5,000 authorized shares or fewer “minimum stock corporations.”
Shares greater than minimum stock corporations
- This calculation is technical. Please call our office and we can “model” the taxes due based on the corporation’s total gross assets from the IRS Form 1120 Schedule L total gross assets, plus the shares you report to us as issued.
- The supplemental annual report filing fee remains unchanged at $50 for corporations with greater than 5,000 authorized shares.
- You can calculate franchise tax by one of two methods (please note: Delaware allows you to pay the lesser amount of the two):
The Authorized Shares Method
By default, Delaware uses this method to calculate corporate franchise taxes, which is based on the corporation’s number of authorized shares. This is how you calculate a corporation’s tax under the Authorized Shares Method, per the state:
- 5,000 shares or less: $175
5,001 – 10,000 shares: $250
Each additional 10,000 shares or portion thereof: add $75
Maximum annual tax: $180,000
Recalculation: The Assumed Par Value (Issued Shares and Assets) Method
If a corporation receives a large franchise tax bill in the thousands of dollars, but it is a small company, it can “recalculate” the franchise tax to save thousands of dollars and only pay the minimum $400 franchise tax. To calculate the tax using this method, the formula requires the corporation to provide the total number of the corporation’s issued shares (including treasury shares held by the company) and total gross assets for the corporation’s fiscal year ending the calendar year of the report. The tax is calculated at $350 per million or portion of a million.
- If the assumed par value capital is less than $1,000,000, you calculate the tax by dividing the amount by $1,000,000, and then multiply that number by $350.
As you can see, the Assumed Par Value Method calculation requires a few steps to calculate and should be done on a computer to avoid mistakes. IncNow.com can help you calculate and pay your company’s franchise tax along with the annual report for a $300 fee. Please call 1-800-759-2248 for assistance.
- Note: The Division of Corporations sends corporations with 5,000 or more shares notices to pay estimated taxes in quarterly installments, with 40 percent due by June 1, another 20 percent due by Sept. 1, plus 20 percent due by Dec. 1, and finally 20 percent due by March 1.
- Non-stock/non-profit corporations do not pay the Delaware Franchise Tax or penalties but must file and pay an annual report fee of just $25 per year.
Delaware LLCs do not file an annual report with the Secretary of State. They only have to pay their annual franchise tax of $300 and maintain a Registered Agent in Delaware.
How Can I Pay My Delaware Franchise Tax?
The State of Delaware requires corporations to pay the franchise tax and file the annual report online. LLCs may pay online or by check in the mail.
You can also file and pay your annual franchise tax now quickly and easily via our sister site, Defrantax.com. Let us help to make the process easy for you!