Most aspiring companies end up incorporating in Delaware to reap the benefits of robust case law and a pro-business attitude. But being a Delaware corporation also comes with franchise tax liability, each and every year.
“But My Business isn’t a Franchise”
Many people hear the term “franchise tax” and assume it’s not applicable to them. After all, they didn’t buy into a fast food chain. Not so. The franchise in franchise tax refers to the State’s authorization for a company to incorporate in the state or do business there.
Did your company incorporate as a C Corporation in Delaware? Then you—yes, you!—are required to file and pay franchise taxes to Delaware every year. As Benjamin Franklin said, “...in this world nothing can be said to be certain, except death and taxes.”
The Annual Report
In addition to paying taxes, you are required to file an annual report. The annual report includes basic information, like your company address and your board members or officers. The annual report must be filed online, and there is a filing fee of $50. The report must be filed by an authorized officer of the corporation, typically the president, secretary, or treasurer (or by the incorporator if the board has not yet been formed).
Annual franchise tax reports and the accompanying taxes are due on or before March 1st each year for Delaware corporations.
The State of Delaware requires quarterly installment payments for all companies who owe $5,000 in taxes or more. Installments are due on June 1st (40%), September 1st (20%), and December 1st (20%), with the remainder due by March 1st.
Two Methods of Tax Calculation
You choose! There are two acceptable methods for calculating Delaware franchise taxes: the Authorized Shares Method and the Assumed Par Value Capital Method. Delaware calculates your estimated tax using the Authorized Shares Method by default, but allows you to choose the method that’s most advantageous to you for your filing.
The two methods use different inputs and different calculations. Depending on the size and equity status of your business, the resulting tax amounts can differ wildly between the two methods. The State of Delaware has a franchise tax calculator on their website to make it easy to estimate and compare.
The minimum tax for companies using the Authorized Shares Method is $175. The minimum tax for companies using the Assumed Par Value Capital Method is $400. With either method the maximum tax is $200,000, unless the company has been identified as a “large corporate filer,” in which case their tax will be $250,000.00.
How to File
Companies can file the Annual Franchise Tax Report on their own, or partner with a registered agent, attorney, or accountant to do so. If you choose file it on your own, (or if you want insight into the process), start with the Delaware tax calculator. Then move on to the DE Annual Report and Tax Instructions page to file your Annual Report and pay your taxes. Questions? Delaware offers a Franchise Tax FAQ to help.
Failure to File and Pay
A penalty of $200 is assessed for failure to file the Annual Franchise Tax report by March 1st, plus interest of 1.5% each month on any unpaid tax and outstanding penalty fee.
Filing an annual report and paying franchise tax is also required to maintain a company's good standing in Delaware. Not filing and paying means your company cannot obtain a good standing certificate and Delaware will declare your company void.
Other States Too!
Most companies that incorporate in Delaware actually operate in other states. You will need to file an annual report and/or pay associated taxes and filing fees in every state where your company is registered to do business as a foreign corporation. Filing deadlines vary, but can be found on each state’s Division of Corporations website, like California, Massachusetts, and New York, just to list a few.
Please note: The fees and other amounts mentioned in this post are accurate as of the time of this writing, but check with Delaware for the most up-to-date information and instructions. Fidelity cannot provide legal or tax advice. Please talk to your attorney or accountant if you have any questions about your company’s tax responsibilities.