Do you have a company set up in Delaware or are you planning to open one soon? Well, in this case, you should know all about the Delaware franchise tax. To explain better, all Delaware corporations have to pay an annual franchise tax to the state. The fee that is imposed by the state of Delaware for the privilege to own a Delaware company is called franchise tax. This tax has no bearing on income or company activity. Moreover, the state of Delaware applies this tax to maintain the operative status of your company. Let us get a bit deeper into the topic to understand it better.
What is Delaware Franchise Tax?
Corporations formed in Delaware are a whole different story as compared to the companies in the other states of America. Generally, foreign corporations, nonprofits, limited liability companies, general partnerships, limited partnerships, and limited liability partnerships pay a flat-rate annual fee or tax. But the companies in Delaware pay the franchise tax.
As mentioned above, the franchise tax is a state tax that is imposed on specific businesses for the right to exist as a legal entity and to do business within a specific jurisdiction. There are two main methods to calculate franchise tax for a company in Delaware. The default method for the State of Delaware is the authorized share method. This option is relatively simple.
Another technique is the assumed par value capital method. This method is more complicated but sets a cheaper tax fee. Regardless of the method used to find the franchise tax, the Delaware Corporations must file their annual franchise taxes online. In fact, the only way to file your Delaware corporate annual report for a domestic corporation is to file online, or you can pay a Delaware registered agent to do it for you.
Franchise Tax Due Date
The due date of your tax varies depending on your company type. For a corporation, the franchise tax is due by March 1 of every year. If the tax is not paid on or before March 1, the state imposes a late fee on the tax, which includes a $200 late penalty, plus a monthly interest fee of 1.5%. Similarly, the franchise tax for a Delaware LLC and limited partnership (LP) is due by June, 1st of every year. If the tax is not paid on or before June 1, the state imposes a $200 late penalty, plus a monthly interest fee of 1.5 percent.
Corporations, LLCs and LPs are taxed in arrears, meaning the tax due by each due date is for the previous calendar year. The franchise tax is due even if the business didn’t conduct any activity or lost money. So, it important that you keep this in mind and follow it accordingly.
Calculating the Franchise Tax
Delaware Franchise Tax is calculated using different ways for different kinds of company structures. To begin with, the franchise tax for a Delaware limited liability company (LLC) and a limited partnership (LP) is a flat annual rate of $300. On the other hand, the franchise tax for a corporation is a little more complicated than this.
Based on your corporation type and the number of authorized shares your company has, the total cost of the franchise tax is comprised of an annual report fee and the actual tax due. A non-stock/non-profit company does not pay the annual tax but must file and pay the annual report fee.
The annual report fee is $25 per year. On the other hand, a corporation with 5,000 authorized shares or less is considered a minimum stock corporation. The annual report fee is $50, and the tax is $175 for a total of $225 per year. And a corporation with 5,001 authorized shares or more is considered a maximum stock corporation. The annual report fee is $50, and the tax would be somewhere between $200 and $200,000 per year.
With this said, there are two methods that corporations can figure their annual franchise tax. Both have been explained below in detail.
Authorized Shares Method
The state of Delaware uses the authorized shares method to calculate your taxes initially. It is the default method used and is calculated based on the number of authorized shares and adds the $50 annual report fee to the franchise tax after it is calculated. The calculation is done as follows:
- 5,000 shares or less(minimum tax): $175
- 5,001 – 10,000 shares: $250
- Additional 10,000 shares or portion thereof: add $85
- The maximum annual tax is $200,000
Assumed Par Value Capital Method
The state of Delaware allows you to pay the lower of the two calculation methods for the franchise tax. And the second method that is used is the assumed par value capital method. The idea behind this method is that it takes a company’s “par value” per share times the number of shares it has authorized (i.e., the total market capitalization), rounds up to the nearest million dollars, and takes 0.035% of that as the tax.
To utilize this filing method, you will need to provide the company’s total gross assets (as reported on Form 1120, Schedule L) and the total number of issued shares. Many times the tax is then calculated to the minimum payment of $400 franchise tax plus the $50 annual report fee. The calculation used for this method is more complicated.
How do I pay my Franchise Tax?
A person can pay their franchise tax online, but the person first has to calculate the amount they owe accurately. The online fee will vary depending on when the online payment is submitted. Basically, corporations have to complete an annual report along with their franchise tax payment. This report must list the company’s physical address (not a P.O. box and not your Registered Agent’s address); the name and physical address of all directors, and if there are any officers, the name, title and physical address of one of the officers.
How can IncParadise help you?
At IncParadise, we provide step by step assistance so that you can pay your Delaware Franchise Tax on time. We have designed the ordering process to be as simple as possible for our clients so that the challenging work is left to us. We also do everything possible to make the incorporation and every other process easy for you. Our goal is to always provide you with top-notch service that will become the foundation stone to a long-standing business relationship.
Services IncParadise offers in Delaware
We at IncParadise, provide a wide range of services from setting your company in Delaware to paying and calculating taxes. Few of the services that are delivered by us are mentioned below:
- Incorporation in Delaware: Our Delaware incorporation experts can guide you through setting up or forming an LLC, a Delaware C Corporation, and Delaware S Corporation in the shortest possible period.
- Employee Identification Number (EIN): Every citizen in the USA has a Social Security Number (SSN), which plays a key role in the identification of the individual residents and similarly, there is an Employee Identification Number (EIN), which is used for identification of business entities formed in the country.
- Delaware Annual Report: A Delaware annual report is one of the most important documents that a registered business entity like a limited liability company or a business corporation needs to file so that it can remain active. There are some states where the annual report is also known as an annual list and has to be filed by both domestic and foreign business entities.
- Delware Registered Agent: A registered agent in Delaware acts as the liaison between your company and the secretary of the state to ensure the process of business formation and dealings is smooth and transparent.
With all this clear, the next thing you need to do is contact us at IncParadise. We would be glad to help you with any service that you are looking for!