An Overview of the Delaware Franchise Tax

For Delaware corporations, franchise taxes are due March 1st of every year for the previous calendar year. A company must pay its taxes by filing an annual report with the Secretary of State of the State of Delaware. The online form will also calculate the correct franchise tax for you.

When clients are thinking about forming Delaware Corporations, one of the most important decisions to make is how many total Authorized Shares of Stock the Corporation will have along with the Par Value of the Shares. This information is listed on the Delaware Certificate of Incorporation filed in Delaware. And one of the most popular questions we receive daily is how many shares of stock should I start my Corporation with? This is a great question as it truly depends on certain factors and will influence your company’s Delaware Franchise Tax owed each year. Most general business corporations are mandated to e-file the estimated tax. The example cited below is for a corporation having 1,000,000 shares of stock with a par value of $1.00 and 250,000 shares of stock with a par value of $5.00 , gross assets of $1,000,000.00 and issued shares totaling 485,000.

Delaware lets you use whichever method amounts to the least tax owed. We often get the question, “why should my startup consider incorporating out-of-state and become a Delaware C-corp? Here are a few reasons why you would want to initially incorporate in Delaware. If you incorporated in Delaware, you need to pay a Delaware Franchise Tax. The calculator below will help you estimate how much you’ll need to pay. The deadline is typically the last day of February – scroll down to access links to visit the Delaware Division of Corporations webpage where you can pay.

Corporate Annual Report

All Delaware-incorporated businesses must, however, still pay the annual franchise tax, submit an annual report, and pay a filing fee. Here’s how to figure out how much you need to pay, how to file, and what happens if you don’t. Once the company has substantial assets, the Par Value method can result in higher taxes. In that case, the simple solution is to consider authorizing a smaller number of shares. According to the latest calculator, 200,000 authorized shares will have a maximum tax of $1,865 – though the assumed par value capital method could get a lower tax amount.

This method calculates the tax based on the number of shares your corporation has authorized. Your corporation will owe an estimated $85 for each 10,000 shares authorized. The minimum tax when using this method is $175, and the maximum tax is $200,000. As you’ll see in the below example, the Authorized Share Method usually results in a higher tax bill for startups, so early stage companies rarely use it.

What are Delaware franchise taxes?

If the tax is not paid by this date, Delaware imposes a $200 penalty, as well as a 1.5 percent interest fee each month. If you incorporated in Delaware, yes, you need to file and pay the Delaware Franchise Tax. Startups are required to file even if you had no financial activity during the year. Thankfully, it’ll get much easier from here due to the flat fee tax obligations that Limited Liability Companies and other business entities pay as part of their annual tax obligations.

In addition to paying the franchise tax, businesses incorporated in Delaware must also file an annual report and pay a small filing fee. Because a company’s tax is based on the number of shares authorized, the quickest and easiest way to lower your future liability is to amend the Certificate of Incorporation to decrease the number of authorized shares. Companies are often formed with a huge number of shares, when, in reality, they don’t need such a large number.

The minimum tax for companies using the Assumed Par Value Capital Method is $400. With either method the maximum tax is $200,000, unless the company has been identified as a “large corporate filer,” in which case their tax will be $250,000.00. To assist Delaware corporations, the state created a franchise tax calculator and a helpful page on how to calculate taxes. For your convenience, we’ve compiled information from the Delaware website below. This tax is often calculated to the minimum payment of $350 for the Franchise tax and another $50 for the annual report fee. The state of Delaware uses this method to calculate the company's taxes initially.

Get the Delaware Franchise Tax Calculator

There are several actions that could trigger this block including submitting a certain word or phrase, a SQL command or malformed data. The franchise tax is paid online at the Division of Corporations website. I don’t think we’ve ever had a tool that’s been able to so quickly provide us with feedback. There are basically four key steps involved when it comes to filing your franchise tax. A breakdown of the fees and due dates for payments are outlined below.

• We typically recommend calculating the franchise tax by using the assumed par value method, which our calculator above does, vs. the authorized share method.
• You should consult with a qualified legal professional for advice regarding any particular issue or problem.
• As you’ll see in the below example, the Authorized Share Method usually results in a higher tax bill for startups, so early stage companies rarely use it.
• Most aspiring companies end up incorporating in Delaware to reap the benefits of robust case law and a pro-business attitude.

For instance, a corporation with 5,000 shares or less will pay the minimum tax of $175. After that, a corporation will need to add an extra $85 to their franchise tax bill for each additional 10,000 shares. Delaware Franchise Tax calculations are prorated if a corporation’s authorized and/or issued shares change during the year. Technology and life sciences companies that choose to incorporate in Delaware must pay an annual franchise tax.

The California franchise tax, for example, is equal to the larger of your California net income multiplied by the 8.84 percent tax rate or the $800 minimum tax. The minimum tax is due the first quarter of each accounting period and must be paid whether your startup is active, inactive, operates at a loss or files a return for a short period of less than 12 months. The minimum tax is waived on newly formed or qualified corporations filing an initial return for their first taxable year. However, any first-year net income is still subject to the 8.84 percent tax rate.

The Assumed Par Value Capital Method

If the company has authorized stock with no par value, this calculation will always result in a lower tax balance than the authorized shares method. Note that the minimum tax for the assumed par value capital method is $350. To use this method, you must give figures for all issued shares (including treasury shares) and total gross assets in the spaces provided in your Annual Franchise Tax Report. Total Gross Assets shall be those “total assets” reported on the U.S. Form 1120, Schedule L (Federal Return) relative to the company’s fiscal year ending the calendar year of the report.

Since 1981, Harvard Business Services, Inc. has helped form 373,386 Delaware corporations and LLCs for people all over the world. You may qualify to claim certain tax credits to reduce your New York State tax liability. Highest tax based on three bases, in addition to the Metropolitan transportation business tax (MTA surcharge), if applicable. You may also use the State of Delaware’s Franchise Tax Calculator for estimating your taxes. When completing the calculation, you must round up to the next million.

You’ll also pay 1.5% per month applied against any unpaid tax and penalty. The Delaware franchise tax is collected every year by the Delaware Department of State. They mail your official business address an annual reminder to pay your franchise taxes. These include a business-friendly How to Prepare Journal Entries with Simple Explanation Accounting Education court system, flexible incorporation rules, and the fact that businesses operating only outside of Delaware don’t have to pay state corporate income tax. Don’t panic – your Delaware Franchise Tax is likely so high because your accountant has used the wrong calculation method.

HOW TO CALCULATE FRANCHISE TAXES

While there can be some satisfaction from owning millions of shares, bear in mind it could result in a large tax bill. Assumed Par Value Capital Method
With this method your Delaware Franchise Tax bill is calculated based on issued shares, authorized shares and total gross assets. Certain exempt domestic corporations like charities, civic organizations and religious organizations do not have to pay the franchise tax. However, they must still file an annual report and pay the filing fee.

This method is calculated using the number of authorized shares in the company. Delaware franchise taxes may be calculated in one of the two ways outlined below. The corporation can select which of the two methods it prefers to use, but the State seems to default to the method that yields a larger tax bill (surprise!). Regardless of which method you choose, the tax due will never be less than $175 or more than $200,000. This tax is calculated at the rate of $350 for each $1,000,000 of total gross assets.

For these reasons, more than a million businesses are incorporated in Delaware, including more than half of all publicly traded and Fortune 500 companies. See our handbook glossary for more information about authorized shares. You can calculate the Delaware franchise tax using one of two methods.

If your company has authorized 5,000 shares or fewer, your total Delaware franchise tax amount is $175. The ASM is based upon the amount of stock a corporation has authorized (as opposed to the number of shares it has actually issued to shareholders). Stock is generally authorized on the Certificate of Incorporation (whereas stock is issued in the bylaws or sold on a public exchange). Failure to complete your filing by the due date will result in penalties, including a $200 fee and 1.5 percent monthly interest. If fees and penalties are not paid, a company risks losing its Certificate of Good Standing and the privilege of remaining in business in Delaware.