How to File Your Delaware Franchise Tax On Time

If you look into recent IPOs, you will find that nearly all of them are incorporated in Delaware.

There are good reasons for that.

Delaware offers tax incentives, business-friendly laws, and a separate court system for corporate disputes. For the same reasons, many small business owners prefer Delaware as well.

However, for the right to own a company incorporated in Delaware, you need to pay Delaware Franchise tax. And contrary to what the name suggests, it must be paid regardless of whether you are running a franchise business or not.

This article covers the nitty-gritty of the Delaware Franchise tax. If you want to register your business in Delaware or are just interested in the topic, this article is for you.

What is Delaware Franchise Tax:

Delaware Franchise tax, simply put, is the tax one pays to retain their right to own a Delaware company. Whether you are making millions or struggling to keep your business alive, you need to pay for it. This tax is for maintaining your business’s good standing.

Corporations registered in Delaware are required to file an Annual report along with the tax. This report includes

• The physical location of the corporate’s office
• The name and address of an officer
• The names and addresses of all directors.

However, LLCs and General partnerships formed in Delaware don’t need this report. They can just pay a flat $300 franchise tax and be done with it.

Exempt domestic corporations don’t need to pay a dime ( as franchise tax). But they still need to file the annual report. Wondering what qualifies as an exempt domestic corporation? A corporation has to meet the following requirements:

• It is exempt from taxation under § 501(c) of the United States Internal Revenue Code or any similar provisions.
• The organization qualifies as a civic one under § 8110(c)(1) of Title 9 or § 6840(4) of Title 16;
• It should qualify as a charitable/fraternal organization under § 2593(1) of Title 6;
• It is listed in § 8106(a) of Title 9;
• It is primarily or exclusively for religious or charitable purposes
• Alternatively, it (i) is not meant for profit, and (ii) no part of its net earnings inures to the benefit of any member or individual.

The Delaware Franchise Tax due date and penalty:

The due date of the Delaware Franchise Tax varies depending on the type of business in question. For example:

Corporations: The Franchise tax for corporations is due by March 1 every year. The tax is due by the above-mentioned date for the previous calendar year. If you fail to pay it by the due date, you will ask for a $200 late penalty and a monthly fee of 1.5% as an unpleasant bonus.

** LLCs and LPs**: The franchise tax due date for both LLCs and LPs is the same: June 1 every year. A $200 late penalty and an extra 1.5% monthly interest fee also apply here.

Please note the franchise tax applies even when you have made zero revenue and/or have abandoned your business already. And in case you fail to pay your taxes, you will be in trouble:

• Delaware Division of Corporations may invalidate or cancel your company.
• Getting loans /grants/ benefits would be almost impossible.
• The record of non-tax payments will always be there. It’s enough to scare new investments and opportunities away.
• Fail to pay your Delaware Franchise tax for consecutive 3 years, and the authority will close the business.

Therefore, pay on time and let the authority know if you ever decide to close your business.

The Delaware Franchise tax calculation:

So clearly, failing to pay your franchise tax is asking for trouble. And that bags the single most important question: “ How much tax am I owed to Delaware authority?”

Let’s get to the answer.

For LLCs and LPs, it’s $300. No need to overburden yourself with complex formulae and numbers with multiple digits on the right side of the decimal point.

However, some number crunching is required if your business is registered as a Corporation in Delaware.

There are two ways to calculate your corporate franchise tax:

1. Authorized shares method
2. Assumed par value capital method.

Ideally, you want to calculate your tax using those two methods. The lower one of those two is your payable tax.

Please note that the total tax should be no less than $175( Authorized shares method) or $400 ( Assumed par value capital method) and not more than $200000.

If the owed amount exceeds $5000, you need to pay them in four installments: 40% due June 1st, 20% due by Sept 1st, 20% due by Dec 1st, and the remainder by March 1st next year.

Here is how you calculate the tax using the above-mentioned methods.

**Authorized shares method: **This method is super easy. If you know the total number of authorized stocks of your company ( which you should), tax calculation will take seconds:

• Corporations with 5000 shares or less pay the minimum tax amount, which is $175.
• If the number of shares lies between 5000-10000, the tax will be $250
• Each additional set of 10000 shares ( or portions) adds $85.

Example: A corporation with 10031 shares authorized pays ( $250+ $85) = $335. Those extra 31 shares are counted as an incomplete 10000 share set.

A corporation with 150000 shares authorized pays {$250+($85 X 14)} = $1440.

**Assumed par value capital method: **

To use this method, you need four pieces of information:

• Number of authorized shares of your company
• Number of issued shares of your company
• The par value of shares
• Gross assets of the company.

You can easily find the par value and the initial number of authorized stocks in incorporation documents. If there were changes later, you would find records in company files.

Issued shares refer to the shares owned by shareholders. The gross asset is usually ( not the perfect definition, though)the sum of your cash balance, pieces of equipment, company properties, investments, and loans. You will find that on your Balance sheet.

You can always ask your CA for your balance sheet. However, if you use Fincent, you can find your updated balance sheet at any time on the “Financials “ tab.

Make sure to match your gross assets with the number you put on your Form 1120, Schedule L.

Once you have all the info, you can go to this link to find the official spreadsheet calculator and use it to calculate your taxes.

Alternatively, you can calculate the tax on your own. Let’s demonstrate how to do that using an example.

Suppose, corporation A has 1,200,000 M authorized shares. The stock par value of 1,000,000 shares is $1.00, and for the remaining 200,000 stocks, it is $4.00. Gross assets amount to $1,000,000. The number of issued shares is 500,000.

Step 1: Divide the total gross assets by the total issued shares carrying to 6 decimal places. This is the “assumed par.” Here the assumed par is ( 1,000,000/500.00) = $2.

Step 2: Multiply the assumed par by the number of authorized shares with a par value less than the assumed par. ($2.00 X 1,000,000)= $2,000,000

Step 3: Multiply the assumed par by the number of authorized shares with a par value> assumed par with their respective par. ( $4.00X 200,000)= $800,000

Step 4: Add #2 and #3. This is your assumed par capital. In the above example, the assumed par capital is $2,000,000+$800,000= $2,800,000

Step 5: Figure your tax by dividing the assumed par value capital, rounded up to the next million if it is over $1,000,000, by 1,000,000 and then multiplying by $400.00. The tax payable in the above example is 3 ( 2.8M is rounded up to 3M and then divided by 1 M) X $400 = $1200.

How to pay your Delaware franchise tax:

Unlike Federal Tax filing, the Delaware Franchise tax is relatively easy to file. However, this can be filed only online.

To start the process, head over to this page and submit your business entity file number. If you forget the number, you can even search for your business by name.

In the next step, you will see a list of tax years(only one if you cleared all the previous ones). Click on the link right next to the tax year that says “File Annual report.”

You will be directed to this page:

Now, you might see a large amount of tax owed on the top right of the page. We are talking about $50,000 or more. It’s natural to feel nervous, but don’t worry. That’s not what you owe actually.

What you want to do here is simply submit your issued shares, gross assets, number of authorized shares, and par value. Then hit recalculate tax. You would see a way lower number this time, which is your actual tax.

The following step involves entering the names and addresses of the company, directors, and officers.

If any of the officers/directors are based out of the US, check the box that says “Non-US address.”

Now re-check your information, click on “continue filling” and use a credit card to pay off your taxes.

Note: If you are a foreign corporation, you must file an Annual Report with the Delaware Secretary of State on or before June 30. The filing fee, in this case, would be $125.00. If you miss the deadline,a $125.00 penalty will be added to the filing fee.

Delaware franchise tax: some common questions

What if I own multiple businesses?

As the owner of multiple LLCs and LPs, you can pay franchise tax for those businesses at the same time. Just fill up your information, search your companies, and pay $300X the number of owned businesses.

However, if you own multiple corporations, then you need to file taxes and annual reports separately for each of them.

What do I need to submit along with my Delaware franchise tax payment?

Delaware LLCs and LPs don’t need to file anything else. Just pay $300 for all the LLCs and LPs you own.

However, for corporations, an “Annual Report” is a must. This report includes information like the names and addresses of the company directors/officers. If the owner(s) is from outside the US, you want to mention that too.

If you are using the assumed par value capital method, you must provide info on your total assets and the number of authorized shares.

What should I do after paying my franchise taxes?

Business owners looking for growth, new rounds of funding, and expansion, should collect the certificate of good standing after clearing the Delaware franchise tax.

It’s a document that you receive from the Delaware Secretary of State. It certifies that 1.) your business is incorporated in Delaware, 2.) you have paid your taxes on time, and 3.) you are in good standing.

The certificate of good standing is required to expand to another state and/or receive new loans or funds.

In conclusion:

The Delaware franchise tax has to be paid if your business is registered in Delaware. If you want to maintain good standing, carry out your business smoothly, open branches in other states, and get loans, this tax must be cleared before the due date.

Unlike other federal taxes, it’s easy to calculate, and you can file it yourself. However, there are other taxes involved that are not as easy to file.

To have an easier time filing taxes, your bookkeeping should be on point. In other words, your transactions must be organized, you should be aware of your cash flow, and none of the records should go missing. That’s where Fincent can help.