Delaware Franchise Tax And Annual Report: What You Need To Know

What is Delaware franchise tax?

The Delaware franchise tax is a fee imposed on businesses incorporated in Delaware to maintain their legal status in the state. It is not an income tax but rather an annual fee that Delaware charges for the privilege of operating as a Delaware entity.

All types of businesses registered in Delaware, including Limited Liability Companies (LLCs), Limited Partnerships (LPs), General Partnerships (GPs), and Corporations, are subject to franchise tax obligation, regardless of where they conduct their business activities.

Specifically, the obligations include

• For LLCs, LPs, and GPs: Make the franchise tax payment in a timely manner.
• For Corporations: Make the franchise tax payment in a timely manner, file a franchise tax report, and pay the filing fee.

How much to pay for franchise tax?

For  domestic and foreign LLC, LP, and GP registered in Delaware, the franchise tax is a fixed annual amount of US$300.

For Corporations registered in Delaware, the franchise tax is calculated differently. You have two options to determine your annual franchise tax:

Authorized Shares Method

The Authorized Shares Method is the standard method prescribed by the State of Delaware for calculating franchise tax for corporations.

It provides a clear and straightforward way to determine the tax liability based on the company’s authorized share structure, with a minimum and maximum cap in place to ensure that the tax remains reasonable for all corporations, regardless of their size.

Here’s how it works:

• Minimum payment: Corporations with 500 authorized shares or fewer are subject to a minimum franchise tax payment of $175.
• Maximum payment: The maximum annual tax cap is set at $200,000. This means that no matter how many authorized shares a corporation has, its franchise tax liability will not exceed $200,000 when calculated using the Authorized Shares Method.

To calculate the franchise tax for corporations with more than 500 authorized shares, you can use the following formula:

Assumed Par Value Capital Method

Unlike the Authorized Shares Method, which is based on the number of authorized shares a corporation has, the Assumed Par Value Capital Method calculates the franchise tax based on the assumed par value capital of the corporation’s authorized shares.

• Minimum payment: $400 for every $1,000,000 or part thereof of assumed par value capital. So, if your assumed par value capital is less than $1,000,000, you would still pay at least $400.
• Maximum payment: The maximum annual tax cap is set at $200,000. This means that even if your assumed par value capital is very high, your franchise tax will not exceed $200,000.

Are there any exemptions for franchise tax?

Certain domestic corporations in Delaware may be exempted from paying franchise tax but are still required to file annual reports to maintain their exempt status.

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

How to pay Delaware franchise tax?

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

Step 1: Start by visiting the State of Delaware – Division of Corporations franchise tax filing page

Step 2: Input your 7-digit Business Entity File Number. If you’re unsure about this number, you can find it by using the lookup tool.

Step 3: Complete the provided webform with the necessary information. Here’s what you’ll need for the filing:

• The legal name of your entity
• The total number of authorized shares, including class and par value details
• The franchise tax and associated fees
• Your business address and phone number
• The name and address of one officer
• The names and addresses of all directors

Step 4: Finalize your payment by using either a credit card or electronic debit payment method.

What is the payment due date for Delaware franchise tax?

Franchise tax payment due dates vary for different types of entities in Delaware.

• For exempt and non-exempt corporations: the due date is March 1st
• For foreign corporations: the due date is June 30th
• For LLCs, LPs, and GPs, the due date is June 1st

If your company has a tax liability exceeding $5000, it is required to make quarterly tax payments with different percentages due on specific dates:

• 40% of the payment is due by June 1st
• 20% of the payment is due by September 1st
• Another 20% is due by December 1st
• The remaining balance is due by March 1st

It’s important to note that these due dates are based on the calendar year, not your company’s fiscal year. This means that even if your company is formed late in the year and hasn’t generated revenue, it still needs to make the franchise tax payment early in the following year.

Get your company tax filed correctly!

Tax filing for your Delaware company is never an easy task.

BBCIncorp is collaborating with TaxHub to ensure tax compliance for your Delaware companies, especially if you’re a non-US resident.

By connecting with us, you can receive a 10% discount code and a free 30-minute CPA consultation from TaxHub specialists.

Feel free to chat with us for more information regarding this matter.

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

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 a 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 currently on its tax payments and in good standing.

How to file an annual franchise tax report?

All Delaware domestic and foreign corporations are required to file an annual franchise tax report and pay the filing fee. Please note that all LPs, LLCs, and GPs don’t need to file annual reports.

What to file?

The franchise tax report should include the following information:

• Registered address: This should be the actual business address and not a P.O. box or the address of the registered agent.
• Details of directors: Include the title, full name, and physical address of each director associated with the corporation.
• Details of officers (if applicable): If the corporation has officers, include their names and addresses in the report.
• Stock details: Number of authorized shares of stock as specified in the Certificate of Incorporation and the par value of the stock.

Below is the payment for filing the annual franchise tax report for each group of corporations:

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

When is the due date?

The due date for filing your report is the same as the date of franchise tax payment, which is March 1st for exempt and non-exempt corporations and June 30th for foreign corporations.

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.

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.

Notice of payment for franchise tax

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.

Free ebook

Planning to incorporate in Delaware?

Here is all you need to know.

Download Now

Download Now

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.