Could Your Startup Be Paying Too High A Franchise Tax In Delaware?

• 03 Feb, 2022
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Could Your Startup Be Paying Too High A Franchise Tax In Delaware?

The default method for the State of Delaware is the Authorized Share Method. This option is fairly simple; 5000 shares or less you pay the minimum $175. If your DE Corporation has high value assets, the Assumed Par Value Capital Method is more complicated, but sets a cheaper tax fee. It is mandatory for Delaware Corporations to file their annual franchise taxes online. They may decide to start with a minimum stock structure which is 1 to 5,000 shares of stock.

It is important to pay these taxes on time in order to keep your business in good standing and avoid penalties. Even companies with no revenue in the previous fiscal year should expect to pay some amount. The annual report includes basic information, such as the names of the corporation’s directors and officers, as well as the corporation’s authorized and outstanding share information. Delaware corporations must complete the filing online through the Delaware Secretary of State’s website. Delaware limited liability companies (LLCs) owe franchise tax by June 1 of each year. Limited partnerships (LPs) also owe franchise tax by June 1 of each year.

Get the Delaware Franchise Tax Calculator

The first is the use of virtual mailboxes, which Delaware does not accept because they require a physical address to know where your company is actually operating from. As a last resort, the CEO can list their personal address, but this is not ideal for everyone. The second reason is bad bank accounts, such as using the wrong bank account on tax filings or not informing your accountant of changes in bank accounts, which can delay tax filings and result in late fees. Don’t panic – your Delaware Franchise Tax is likely so high because your accountant has used the wrong calculation method. Use the calculation method in our estimator above to estimate how much you likely owe. Your company will likely need to use the assumed par value calculation method instead of the authorized share method of calculation.

Stock is generally authorized on the Certificate of Incorporation (whereas stock is issued in the bylaws or sold on a public exchange). If you’ve authorized 5,001 to 10,000 shares, your franchise tax is $250. If your company has authorized 5,000 shares or fewer, your total Delaware franchise tax amount is $175.

Delaware Annual Franchise Tax Directions

This means that the tax due is based on the previous calendar year. 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. In fact, even if your business has been inactive for the year, you will still need to pay a franchise tax. This tax is imposed on all Delaware-based businesses that want to maintain their good standing in the state — whether they are dormant or active. 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).

A second method for calculating, called the assumed par value method, can be used if a corporation’s tax bill is deemed by a business owner to be too high. In this example, a corporation tax bill is calculated by taking into account the total gross assets of a business. The math here is a little more complicated, but if the tax obligation using the authorized shares method comes in too high, this option can save a business hundreds, if not thousands, of dollars. The Delaware Division of Corporations provides two methods to calculate Delaware franchise tax. The first method is based on the authorized share count, and VC-backed startups with option pools can quickly get to thousands of dollars in taxes due.

Method #1: Authorized Share Method (default method)

There is a $200 penalty for failure to file a complete report by the due date. Also, the Secretary of State will not issue a Certificate of Good Standing for a corporation that owes franchise taxes or a completed report. The Delaware Secretary of State’s website provides the following helpful information and tips, including how to determine the most advantageous method for calculating the franchise taxes owed. Filing an annual report and paying franchise tax is also required to maintain a company’s good standing in Delaware. Not filing and paying means your company cannot obtain a good standing certificate and Delaware will declare your company void. This tax is often calculated to the minimum payment of $350 for the Franchise tax and another $50 for the annual report fee.

• A corporation with 20,000 shares authorized pays $335 ($250 plus $85).
• All corporations using either method will have a maximum tax of $200,000.00 unless it has been identified as a Large Corporate Filer, then the tax will be $250,000.00.
• This applies to whether you are operating a limited liability company (LLC), nonprofit, corporation or partnership.
• Corporations using the authorized shares method will pay a minimum of $175 and a maximum of $200,000.
• Delaware would automatically show the higher tax due on their website using the authorized shares method.

Let’s imagine a Delaware-incorporated company reported total gross assets of $1,000,000 on their federal taxes this year. Delaware requires that annual report(s) be current prior to all dissolution and merger filings. At the time of dissolution or merger, all franchise taxes must be paid through the date of the filing of the Certificate of Dissolution or Merger with the Delaware Secretary of State. All Delaware C Corporations are required to pay the Delaware Franchise Tax and to file an Annual Report. This is a tax charged by the state on all corporations registered in Delaware.

How do I pay my franchise taxes and file the annual report?

You can calculate the Delaware franchise tax using one of two methods. 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.

After that, a corporation will need to add an extra $85 to their franchise tax bill for each additional 10,000 shares. You’ll need to know your corporation’s gross assets and authorized shares. The Assumed Par Value Capital Method in the above example results in a much lower tax ($26,800 vs. $170,165). Delaware would automatically show the the difference between cash flow and profit higher tax due on their website using the authorized shares method. It is up to the taxpayer to select the Assumed Par Value Capital Method if it results in a lower tax. This article discusses how the tax is calculated, filing and payment due dates and other requirements applicable to for-profit C corporations that incorporate in Delaware.