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Delaware Franchise Tax

Most of the states in the US have taxes on their business income, and these taxes also have various forms. If you have just opened a business in Delaware, then the tax you are paying to the state is called the Delaware Franchise Tax. Not clear about this? The information provided below will give you a better idea of everything related to the Delaware franchise tax payment.

In the US, a few states tax only the corporations, while the others tax almost every business type. Each state calls the taxes by different names and the meanings usually get confused. Let us take for example; Texas uses gross receipts as one way to force its franchise tax, while Delaware calls the income tax a franchise tax.

Also, the sole proprietorships are not normally subjected to the franchise taxes and all the other forms of the state business income tax. And this is partly because they have not been formally registered with the state in which they are doing business in. Let us understand this deeper and all the aspects of this as well.

What is a Franchise Tax?

A franchise tax is something that is charged by the state to the LLC’s, Partnerships, and Corporations for the opportunity of doing business or incorporating a business in that state. They have the same rules where they are imposed annually, and the failure to pay the Delaware taxes online or otherwise on time. This would disqualify a business from running or doing any sort of business in that state.

The Delaware Franchise Tax is imposed on companies that do business in a state; in short, it follows the concept of location or nexus. Figuring out the link is complicated, that includes if the company sells in the state, has a physical location in the state, or has employees in the state.

Some companies do business in several states, and customarily the corporation is formally registered in multiple states or even in just one state. This depends on the demands of each state. Also, if your business is registered in many states, you would have to comply with the Delaware franchise tax payment for each in this case.

What a Delaware Franchise Tax is NOT

Yes, what you have been thinking about the franchise tax is not right. It is not the tax on franchises. Right, it is not the method to tax all the McDonald’s franchises in the state. The Delaware Franchise Tax is something more than that.

How the States determine Franchise Taxes?

Every state has a very different method to determine the type of business entities that have to pay the franchise taxes, the tax rate and the basis for the tax (either capital or income.) The various criterias that states use are:

  • gross receipts
  • net investment in tangible personal property or assess the value of the real and tangible personal property
  • net worth
  • paid-in capital
  • value of capital stock, shares of stock, or par value of stock
  • income (here, the franchise tax is really an income tax)

What is the Delaware Franchise Tax?

Once you have started a company in Delaware, it is very crucial to keep a good standing of the business, since the liability shield of the business is in place only if the company is currently in a good standing. And if this is lost, the shield falls as well. This eventually exposes the company owner’s personal assets to the creditors of the corporation.

The Delaware law demands that the businesses incorporated in Delaware have to pay Delaware taxes online or otherwise annually. This is an essential privilege fee to let a company maintain a good standing in the state. For a corporation, you would also need to file a simple annual report listing the directors online for keeping the corporation in a good standing.
Delaware Franchise Tax is not calculated depending on the company’s income, which means that the companies that do not have any business activity also need to file the annual report and pay the Delaware taxes online for maintaining a good standing status.

Moreover, it is vital that you understand that the Delaware Franchise Tax fee is the opportunity of keeping a Delaware company standing in the right place along with the rights and protections of the company. It is more like paying the dues of being a member of a club, even if you used the privileges a little or did not use it at all. This does not allow the administrative dissolution and it also has nothing to do with the revenues and incomes of a business.

The Delaware Franchise Tax Due Dates

The Delaware limited partnerships (LPs), limited liability companies (LLCs), and Corporations are obligated for Delaware franchise tax payment annually. The companies in Delaware are sent the franchise tax notifications for the last year and not the current year unless they wish to dissolve their business. Moreover, in this case, the company has to pay the fee for the current year as well, before the dissolution.

Furthermore, if you are a person who wants to own a corporation that is ambitious in empowering a large number of shares and are not careful with how many shares you issue, this retroactive franchise tax can generate a “gotcha” situation for your company. Hence, it is advised that if you are incorporating your business in Delaware, you need to have about 5,000 or fewer authorized shares to minimize the annual Delaware Franchise Tax.

Therefore, avoid this potential corporate tax trap without blindly empowering millions of shares and then issuing a small number of shares for the business. Unfortunately, this is for the companies that are Corporations and not for those that are LPs or LLCs. This is since the annual Delaware Franchise Tax is filed and is not formed based on ownership interest calculations.

The Delaware franchise tax for the LPs, LLCs, and Corporations are due once a year on a special date:

LLCs and LPs

The LPs and LLCs in Delaware need to pay an annual Delaware Franchise Tax to the state by June 1st. Moreover, they can also pay earlier, that is before June 1st, but not later than this date. The fee for the LLCs and the LPs is just $300 for one year. If anyone fails to pay the fee on time, it will result in a $200 late fee along with a 1.5 percent monthly interest as a penalty.

Since the Delaware LPs and LLCs owe just $300 annually of the franchise tax, it makes the tax simple to budget. It is a small amount to pay for the advantages provided to you under the Delaware law.

Corporations

The Delaware Franchise Tax for a corporation is due by the 1st of March every year. Moreover, the corporations can also pay the tax before the due date, but not after it. Any corporation in Delaware that does not provide with the Delaware franchise tax payment on time would automatically be assessed with a $125 late fee, along with a 1.5 percent monthly interest as a penalty. Moreover, a corporation with under 5,000 shares has a tax of $175 added to a $50 fee for the filing.

Delaware Corporation Franchise Tax and the Annual Report

The corporation’s Delaware Franchise Tax is based on the number of the authorized shares of stock that has been mentioned in the Certificate of Incorporation.

Corporations

The corporations would have to file the annual report that would list the directors’ addresses as well as names at the same time as the filing date and pay the little annual report filing fee along with the Delaware Franchise Tax fee every year. Also, the electronic signature under this filing is under threat of perjury.

The Delaware franchise tax fee amount would be based entirely on the number of shares the corporation has. The minimum stock corporations are those that have about 5,000 or less authorized shares that have been listed on their Certificate of Incorporation.

Shares greater than minimum stock corporations

Since this calculation is a technical one, it is advised for you to call up our office or get some professional help regarding it. With the expert help, you would be able to get the due taxes amount based on the corporation’s total gross assets from the IRS Form 1120 Schedule L total gross assets, along with the shares that have been reported as being issued.

Moreover, the supplemental annual report filing fee stays the same at $50 for the corporations that have a higher number of authorized shares which is above 5,000. In case, you still want to know how the Delaware Franchise Tax is calculated, it has been provided below. There are two methods that have been shared below and it should be noted that Delaware permits you to pay the amount that is lesser from the both:

The Authorized Shares Method

It is by default that Delaware utilizes this technique to calculate the Delaware franchise tax payment for a corporation. Moreover, this is based on the number of authorized shares of the corporation. And in short, this is how the tax of the corporation is calculated in the end under the Authorized Shares Method. The points that help the calculation here are:

  • For 5,000 shares or less – there is a $175 fee.
  • For 5,001 – 10,000 shares – there is a $250 fee.
  • Each additional 10,000 shares or portion: there is an amount of $75 added to the total fee.
  • Maximum annual tax for the Delaware Franchise Tax is $180,000.

Recalculate

The Assumed Par Value Method for Issued Shares and Assets:

In case a corporation gets a massive Delaware Franchise Tax bill that is in thousands of dollars, while the company is a small one. The company is allowed to recalculate the Delaware franchise tax payment for saving thousands of dollars and only pay a minimum of $400 tax.

For calculating the fee with this method, you would need to add the number of the issued shares by the corporation. This would also include the treasury shares held by the company, along with this you would need the total gross assets for the fiscal year of the corporation ending the calendar year of the report. The Delaware Franchise Tax is calculated at $350 portion of a million or per million.

From the above explanation, it is understood that the Assumed Par Value Method calculation needs a few steps for the calculation and has to be done on a computer system so that there are no errors. Inc Paradise can help in calculating the amount and even pay the Delaware Franchise Tax for you along with the annual report. For details, please contact us!

Note: A corporation that has 5000 or more shares would also be notified of the Delaware franchise tax payment that has been estimated in quarterly installments. And in this, 40% would be due by June 1st, another 20% due by September 1st, 20% due by December 1st, and finally 20% due by March 1st.

Non-Stock/Non-Profit Corporations

These corporation types don’t pay the Delaware Franchise Tax or the related penalties. But they have to file and pay the annual report fee every year of approximately $25.

How to pay the Delaware taxes online?

Yes, you read it right. The Delaware Franchise Tax is paid for online, and this is along with the annual report which is also filed online for the corporations in Delaware. The LLCs in Delaware has two options where they can pay online or by sending a check in the mail.

Do you need to submit anything else along with the Delaware franchise tax payment?

Yes, the corporations would also have to complete the annual report along with the Delaware Franchise Tax payment, where the report would list the physical address of the company. This does not have be the PO box of the company or the Registered Agent’s address helping you out. Other than the address, it also has to have the name and physical address of all directors. In case there are any officers, one of the officer’s name, title and physical address has to be shared.

In case, the tax is being calculated using the assumed par value capital method, the issued shares, and the gross assets also have to be listed. And in case you decide to pay the Delaware Franchise Tax for a corporation via the phone, you would have to send the annual report separately by email, mail, or fax.

If you need more help for this or are not clear about this, Inc Paradise can help you with this. Contact us to find out more details for paying your Delaware Franchise Tax on time.