Businesses are attracted to Delaware for many reasons including an advantageous tax structure, a business-friendly legal system and the state’s familiarity to investors and banks. These benefits have drawn more than two-thirds of Fortune 500 companies and a significant number of companies incorporated outside their home state. However, corporations registered in Delaware are also responsible for paying an annual franchise tax and filing an annual report for legal and financial purposes, even if the business is not active or does not operate in Delaware.
Despite its name, the franchise “tax” is not calculated based on business revenue but is a fee each corporation must pay for the privilege of maintaining a presence in the state. In this article, we help business owners navigate their responsibilities and understand deadlines and payment expectations related to the franchise tax to avoid paying more than they must or, potentially, fall out of compliance in Delaware.
Does My Business Have to Pay the Annual Franchise Tax in Delaware?
Only for-profit S corporations and C corporations, including venture-backed startups and holding companies, are responsible for paying a franchise tax in Delaware, which is due each year by March 1. LLCs, general partnerships and limited partnerships, on the other hand, pay no franchise tax; their sole obligation is a $300 flat tax payment by June 1 each year.
How Does My Business Pay the Annual Franchise Tax in Delaware?
Each December, the Delaware Division of Corporations distributes a notice to the registered agents of corporations required to pay the franchise tax. Each notice provides a calculated liability amount but as discussed below, each corporation can self-assess its obligation differently. Franchise tax payments and annual reports must be paid via the Delaware Division of Corporations eCorp portal.
How Much is the Franchise Tax in Delaware?
The franchise tax liability sent by the Division of Corporations derives from a calculation known as the Authorized Shares method. This method reflects the number of shares authorized by the corporation in its certificate of incorporation, an amount that may be much higher than the actual number of shares issued. The Authorized Shares method determines the franchise tax amount based on the following:
- $175: the franchise tax for corporations with 5,000 or fewer authorized shares
- $250: 5,001 – 10,000 authorized shares
- $85: the amount added for every additional 10,000 shares or portion thereof authorized by the corporation
- $200,000: the maximum franchise tax amount for corporations not considered large filers
The annual franchise tax obligation for each required corporation ranges, in short, from $175 to $200,000. (Special Note: A few special corporate filers, typically publicly traded companies with significant gross revenue and assets as reported in SEC filings, may be liable for an annual franchise tax up to $250,000.)
Corporations registered in Delaware should understand how this calculation works since many new startups may, in their certificates of incorporation, choose to authorize millions of shares for the benefit of founders, employees and other investors. This choice can potentially lead to a burdensome tax bill before having generated revenue or accumulated assets.
A corporation may elect to re-calculate its liability using the Assumed Par Value Capital method, an alternative method which depends, instead, on the number of total issued shares and the gross assets of the business. This method often lowers the corporation’s liability, sometimes substantially, and is calculated by these steps:
- Calculate the assumed par value by dividing the total gross assets listed on the corporation’s federal tax return by the number of issued shares
- Calculate the assumed par value capital by multiplying the assumed par values by the number of authorized shares
- The result is the capital base that can be taxed by Delaware
- Apply the Delaware tax rate to the capital amount ($400 per $1,000,000 or fraction thereof of assumed par value capital
One small drawback to the Assumed Par Value Capital method is that the minimum tax liability jumps from $175 to $400.
Regardless of the method used by the corporation to determine its franchise tax liability, the online payment process will include a $50 filing fee.
Is My Business Considered a Large Filer for the Delaware Franchise Tax?
Delaware recognizes some businesses as “large filers”. These are corporations with a franchise tax liability of at least $5,000. Large filers do not submit their one-time franchise tax payment by the March 1 deadline each year. Instead, their liability shifts to an estimated franchise tax payment schedule of quarterly payments. Payments are made according to the following schedule:
- June 1– 40% of the tax owed from the previous year
- September 1 – an additional 20%
- December 1 – an additional 20%
- March 1 – the remaining balance is paid
What Happens to My Delaware Franchise Tax Liability If My Business Amends Its Authorized Shares?
Overall, the Delaware franchise tax requirement has nothing to do with business revenue and everything to do with the shares authorized by a corporation. A single amendment can drastically impact the corporation’s tax liability.
When a corporation changes its authorized shares, it is required to file a certificate of amendment with the Delaware Division of Corporations. The corporation must list the updated share information on its next March 1 franchise tax report.
What Happens If My Business Doesn’t Pay the Franchise Tax?
Businesses that do not pay their annual liability, either the franchise tax for corporations or an annual registration fee for LLCs and partnerships, are subject to financial penalties, as detailed below:
- $200: late filing penalty for corporations, LLC and partnerships
- 1.5% interest per month on unpaid liability
Ongoing delinquency for noncompliant businesses can lead to drastic business impacts, such as having their charter declared void or cancelled, which strips the business’ legal identity as well as its ability to obtain financing or contracts, not just in Delaware, but in other states as well.
How Do I Minimize the Franchise Tax Liability for My Corporation in Delaware?
Businesses should also plan for important filing and payment deadlines, recognizing the methods used to calculate the franchise tax, and developing a sound strategy to minimize their tax obligation while complying with franchise tax law requirements. Finally, corporations that engage in activities that lead to authorized share amendments (e.g. stock splits, venture financing) should have the means to forecast future payment obligations to avoid unpleasant liabilities later on.
Windham Brannon has partnered with many corporations registered in Delaware that are obligated to pay the annual franchise tax. We work with owners and executive teams to navigate the requirements to protect their business from unnecessarily high bills and other uncertainties. If your corporation is registered in Delaware, we encourage you to have all facts to stay compliant, avoiding penalties and maintaining the good standing of your business.
If you have questions or would like support, please reach out to Tim Clancy, Andrew Jones or our team.
