Delaware franchise tax rate and annual report

Have you ever received a letter from the State of Delaware asking you to file an annual report with Delaware’s franchise tax payment? Will the notice come even when your company hasn’t generated any revenue yet, or at the start of the new year when your company has been registered at the end of the previous year?

This blog will give you a detailed explanation of the Delaware franchise tax and annual reports.

What are Delaware franchise tax and annual tax?

Let’s dive into the concept of Delaware franchise tax and annual tax, so you can get a better understanding of these terms.

Delaware franchise tax and annual tax

A franchise tax is a state charge imposed on companies in exchange for the right to operate legally and commercially in a particular area. It is a crucial factor for the privilege of legally setting up your company and maintaining good standing status in Delaware. Your franchise tax is determined by the type of your business, not the company’s income.

Many business operators in Delaware are confused about the definition of the franchise tax, mistaking it for the tax imposed on a franchise and believe the tax doesn’t have any relation to their business. Some don’t know how it works, causing them to face difficulties with taxation issues.

All Delaware corporations are subject to the franchise tax regardless of where they conduct business except for exempt domestic corporations.

Exempt domestic corporations

Exempt domestic corporations

The exempt domestic corporations are defined in Delaware Code Title 8. Corporations § 501. Those corporations are discharged from franchise tax, but they still need to file annual reports.

Non-stock, non-profit businesses which meet requirements as exempt corporations are not subject to the franchise tax.

The franchise tax for Domestic and Foreign Limited Liability Companies (LLCs), Limited Partnerships (LPs), and General Partnerships (GPs) formed or registered in Delaware is a flat annual rate of US$300.

On the other hand, the franchise tax for Delaware corporations is based on the type of business and the number of authorized shares, which is a bit more complicated. If a corporation is flagged as a Large Corporate Filer, it must pay US$250,000 in annual franchise taxes.

Compliance with franchise tax is one of the key requirements for the establishment of your Delaware corporation. Learn more in our article on how to form a Delaware corporation.

How to calculate franchise tax for your corporation

As stated above, only Delaware corporations are included in the calculation of franchise tax. Other kinds of entities are subject to a fixed amount annually.

You can calculate the annual franchise tax of your corporation in one of two ways.

  • Authorized Shares Method is a standard procedure used by the State of Delaware. The minimum payment for this option is US$175 (for a corporation with 500 shares or less), up to a maximum yearly tax of US$200,000.
  • Assumed Par Value Capital Method offers lower tax rates if your corporation has high-value assets. The minimum tax you have to pay is US$400 (per $1,000,000, or part thereof, of assumed par value capital), up to a maximum of US$200,000.

How to pay Delaware franchise tax?

You can pay franchise tax online by following these 4 steps:

Step 1: Go to the State of Delaware – Division of Corporations franchise tax filing page

Step 2: Enter your 7-digit Business Entity File Number; you can look up your number here

Step 3: Provide the required information in the templated webform

Here is the required information for the filing:

  • The legal name of the entity
  • Total number of authorized shares, class and par value of the shares
  • A franchise tax and fees
  • Business address and phone number
  • Name and address of one officer
  • Names and addresses of all directors

Step 4: Pay your tax and filing fee by credit card or electronic debit payment

What are other considerations for Delaware franchise tax?

Make sure you take note of the following key factors to handle franchise tax for your Delaware company smoothly.

When to pay Delaware franchise tax

The due date of franchise tax payments for Delaware corporations for the previous year is on or before the 1st of March. For LPs, LLCs, and GPs, the tax due is on or before the 1st of June.

For a company with over $5000 tax liability, it is compulsory to make quarterly tax payments with different amounts and the due dates for each quarter:

  • 40% of the payment due on the 1st of June
  • 20% of the payment due by the 1st of September
  • 20% of the payment due by the 1st of December
  • The remainder is due on the 1st of March

One thing the payer should keep in mind is that the due is based on the calendar year, not the company’s fiscal year. So a company formed at the end of the year still must pay the franchise tax in the early next year even without the revenue generated.

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It is crucial to follow Delaware corporation franchise tax due date. There is a penalty system created by the State of Delaware for companies missing payment deadlines:

  • For domestic corporations, LPs, LLCs, and GPs, missing the deadlines ends in a penalty of $200 plus 1.5% of interest each month on the penalty.
  • For foreign corporations, a penalty of $125 will be added to the filing fee.
  • Missing the deadline for one-year results in the void declaration for the companies. Aside from any potential legal consequences, the companies will not be able to obtain a Certificate of Good Standing in Delaware.

If you dissolve your Delaware company before the end of the calendar year, you will avoid owing franchise tax to the state for the next year.

What happens if you don’t pay Delaware franchise tax?

It is crucial to follow Delaware corporation franchise tax due date. There is a penalty system created by the State of Delaware for companies missing payment deadlines:

  • For domestic corporations, LPs, LLCs, and GPs, missing the deadlines ends in a penalty of $200 plus 1.5% of interest each month on the penalty
  • For foreign corporations, a penalty of $125 will be added to the filing fee
  • Missing the deadline for one-year results in the void declaration for the companies. Aside from any potential legal consequences, the companies will not be able to obtain a Certificate of Good Standing in Delaware

Following the payment of franchise tax, you might be eligible to acquire a Delaware Certificate of Good Standing, a document sent directly from the Delaware Secretary of State attesting that your business is current on its tax payments and in good standing.

You are also required to submit an annual report along with payment of the franchise tax, indicating your company’s registered address (not a P.O. box or the address of your registered agent), the title, name, and physical address of each director, along with the names and addresses of any officers, if any.

What is the annual report required for Delaware companies?

The annual report is a document including all important information regarding corporate details (such as the board of members, company address, etc.) and business activities of a Delaware company. Depending on each state’s requirements, the needed information for annual report submission can be varied.

Typically, a Delaware annual report shall include:

  • The physical address of the Delaware company,
  • Name and address of at least one company member,
  • Names and addresses of all directors.

All LPs, LLCs and GPs don’t need to file annual reports.

On the contrary, all Delaware domestic and foreign corporations are required to do the filing. Below is the payment for filing the annual report for each group of corporations:

  • Exempt corporations: $25
  • Non-exempt corporations: $50
  • Foreign corporations: $125

The due date for annual report filing is the same as the franchise tax filing which is on or before the 1st of March. Foreign corporations must file annual reports with the Delaware Secretary of State on or before the 30th of June.

The penalty subject to Delaware companies that fail to file the report is the same as the penalty for failing to pay a franchise tax.

Note

Note

For all companies in Delaware, there will be a notice of payment amount and dues sent from The Secretary of The State to the registered agent. Delaware requires all annual reports and franchise tax to be processed and paid online in only US dollars drawn from US banks.

The companies can proceed with filings and payments electronically via the Delaware Division of Corporations or the registered agent’s online system.

What are common filing requirements for Delaware companies at the federal level?

Delaware companies are also required to do some other annual filings. Depending on the business entity and the business activity, your business in Delaware may be required to file form 5472 or financial account reports like FATCA or FABAR at the federal level.

  • Form 5472

Form 5472 is used to make reportable transactions between the report corporation and foreign or domestic parties transparent to the Internal Revenue Service (IRS). The applicable companies are 25% foreign-owned US corporations including a foreign-owned US disregarded entity, or foreign corporations conducting any business within the US.

Relevant entities must file the form together with the income tax returns by the due date of that tax filing. For the disregarded entities with no income tax filing requirements, the companies must file a pro forma Form 1120 with Form 5472.

  • Foreign Bank And Financial Accounts Report (FBAR)

All Delaware companies which have a foreign bank account or other financial accounts with foreign wealth beyond US$ 10000 are required to file Foreign Bank And Financial Accounts Report. The purpose of the filing is to report all money and assets engaged in the accounts to the Internal Revenue Service (IRS) and the Financial Crimes Enforcement Network (FinCEN).

The report must be filed by the due date on the 15th of April or by the automatic extension due on October 15th. A civil monetary penalty or criminal penalty will be applied for companies that fail to file the report.

  • Foreign Account Tax Compliance Act (FATCA)

FATCA bears the same reporting nature as FBAR. FATCA is applicable to domestic companies and specified US persons. The Act was established by the government for federal tax administration purposes. It imposes certain regulations on financial or nonfinancial institutions and organizations. Form 8938 is used for the report and must be attached with the annual tax return filing by the due date of such return.

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Conclusion

Delaware franchise tax, annual reports, and filing requirements are key maintenance tasks for most entities doing business in Delaware. Such issues are considerably complicated and usually cause them trouble. It is highly recommended that you should consult your tax expert before filing.

Disclaimer: While BBCIncorp strives to make the information on this website as timely and accurate as possible, the information itself is for reference purposes only. You should not substitute the information provided in this article for competent legal advice. Feel free to contact BBCIncorp’s customer services for advice on your specific cases.

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