Franchise tax is a tax charged by Delaware to businesses for the right to do business in the state. It is separate from income taxes owed by the business, and applies to most businesses, not just “franchises”, despite the name.
If your business was formed or registered in Delaware at any point during a year, you owe franchise tax there for that year. It’s not prorated on the number of days. The calculation method and due date depends on your entity type.
For LLCs, Delaware's "annual tax" is $300. Easy. (Delaware calls this an "annual tax" rather than a "franchise tax"; who knows why).
For corporations, it’s a bit more complicated. The minimum franchise tax in Delaware is $175, and the maximum is $250,000. Delaware allows you to pay with the lesser of two methods: the Authorized Shares Method or the Assumed Par Value Method.
The Authorized Shares Method tax is a bit simpler and calculated based on the number of authorized shares. If you have no par value stock, this method will always be less. If you have a lot of authorized shares, this method will be a large amount. For example, if you have a little over 23 million authorized shares, you’ll be at or near the maximum annual tax. Here’s how you calculate it:
The Assumed Par Value Method is a little more complicated but can be less than the authorized shares method if you have a lot of shares. You’ll need to know total gross assets, total issued shares, and total authorized shares. Here’s how you calculate it:
Divide your total gross assets by your total issued shares carrying to 6 decimal places. The result is your “assumed par”.
Gross assets is “total assets” reported on the U.S. Form 1120, Schedule L (Federal Return) relative to the company’s fiscal year ending the calendar year of the report.
Multiply the assumed par by the number of authorized shares having a par value (as listed on your articles of incorporation) of less than the assumed par.
Multiply the number of authorized shares with a par value (as listed on your articles of incorporation) greater than the assumed par by their respective par value.
Add the results of #2 and #3 above. The result is your assumed par value capital.
Calculate 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 multiply by $400.00.
There are specific monetary penalties for not paying franchise tax, but more importantly, you can have your charter voided. Penalty for non-payment or late payment is $200.00. Interest accrues on the tax and penalty at the rate of 1.5% per month.
If a corporation doesn’t pay franchise tax in Delaware for one year, the corporation’s charter in Delaware will be voided. 8 DE Code § 510
If an LLC doesn’t pay franchise tax in Delaware, Delaware can remove the LLC’s good standing, file an injunction to do business in the state, and if not paid within three years of the due date, have its certificate of formation canceled 6 DE Code § 18-1107 and § 18-1108.
For corporations, if your business is active in Delaware in a given year, Franchise taxes are due March 1st of the following year.
For LLCs, if your business is active in Delaware in a given year, Franchise taxes are due June 1st of the following year.
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