Delaware, known as the “Corporate Capital of the World,” attracts numerous businesses with its business-friendly environment, flexible corporate governance, and favorable legal system. But did you know it has a franchise tax that is imposed on businesses incorporated in Delaware. This tax acts as a significant revenue stream for the state.
What is Franchise Tax?
Delaware charges an annual franchise tax on businesses incorporated or operating within the state. It is levied on various types of business entities, including corporations, LLCs, limited partnerships (LPs), and limited liability partnerships (LLPs).
Filing and Deadline
All corporations must submit an annual report with company details and pay the franchise tax during filing. Although the franchise tax is not applicable on exempt domestic corporations, they must still file the annual report. All filings are due by March 1st each year.
However, for LLCs, LPs and LLPs, they are only required to pay an annual tax. Taxes should be received by the Delaware Department of State on or before June 1st of each year.
Fees and Penalties
The tax calculation requirements differ based on the type of entity. LLCs, LPs, and LLPs formed in the State of Delaware must pay an annual tax of $300.00. The 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.
Corporations compute the tax using either the authorized shares method or the assumed par value capital method. All corporations utilizing either method will face a maximum tax of $200,000. However, if identified as a Large Corporate Filer, the maximum tax reaches $250,000.
Corporations with a par value for their authorized shares calculate the franchise tax based on the number of authorized shares and the state’s predetermined tax rate, plus $50.00 annual report fee. The calculation is as follows:
- 5,000 shares or less (minimum tax) $175.00.
- 5,001 – 10,000 shares – $250.00.
- Each additional 10,000 shares or portion thereof add $85.00.
- Assumed Par Value Capital Method
To utilize this approach, you need to provide the numbers for all shares issued (including treasury shares) and the total value of gross assets in the designated sections of the corporation’s annual report. The total gross assets should correspond to the “total assets” figure reported on the U.S. Form 1120, Schedule L for the company’s fiscal year ending in the calendar year of the report. The tax rate for this method is $400.00 per million or portion of a million.
Taxpayers owing $5,000.00 or more pay estimated taxes in quarterly installments with 40% due June 1st, 20% due by September 1st, 20% due by December 1, and the remainder due March 1st. The penalty for not filing a completed Annual Report on or before March 1st is $200.00 Interest at 1.5% per month is applied to any unpaid tax balance.
While the Delaware franchise tax may come as a surprise to some, it should not deter businesses from considering incorporation in the state. Delaware offers privacy protection, ease of management, and a favorable business environment that promotes growth and success.
