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Before we dive in, let’s clear one thing up: A Delaware franchise tax does not mean that you are paying a tax for your franchise. Contrary to the name, this tax doesn’t just apply solely to people who operate chain restaurants, coffee shops or drive-thrus, but rather to most business types formed in Delaware.
Over a dozen states, including Alabama, California, Georgia, New York and Texas, have a franchise tax. This specific tax is implemented on companies for the privilege of doing business in the state. It is also calculated by net worth as opposed to net income.
Let's learn more about what the Delaware franchise tax actually entails, how much it costs, how to calculate the cost and what can happen to a business if the tax is not paid.
Even though Delaware is the second smallest state in size (after Rhode Island) and falls in at number 45 when it comes to population, this state ranks high when it comes to business formations. Close to three-quarters of all Fortune 500 companies are incorporated in Delaware, including the 1.6 million businesses that have formed in the state as of 2020.
If you own a business based in Delaware, then you are subject to the Delaware Franchise Tax, which needs to be paid annually. This applies to whether you are operating a limited liability company (LLC), nonprofit, corporation or partnership.
The tax is not an income tax. In fact, even if your business has been inactive for the year, you will still need to pay a franchise tax. This tax is imposed on all Delaware-based businesses that want to maintain their good standing in the state — whether they are dormant or active.
Now that we know what the Delaware franchise tax actually is, and who has to pay it — in essence, everyone with a business in Delaware — let’s look at what businesses need to do to figure out how much they owe.
The annual franchise fee will vary on the type of business. Delaware's franchise tax is pretty straightforward for some business entities as it uses a flat fee, but it is more complex for others. One example can be seen in the franchise tax assessment for corporations.
Let’s begin by looking at the two methods used by corporations to calculate their tax franchise obligation:
The first option illustrates the default method used by the state to calculate corporate franchise taxes. Commonly referred to as the annual shares method, it is based on the number of authorized shares issued by a company.
For instance, a corporation with 5,000 shares or less will pay the minimum tax of $175. The next level is a tax of $250 for 5,001 to 10,000 shares. After that, a corporation will need to add an extra $85 to their franchise tax bill for each additional 10,000 shares.
ABC Corp has 3,200 authorized shares and pays a franchise tax of $175, while XYZ Corp has 32,000 shares and pays $505.
For ABC Corp, the math is straightforward.
>5,000 = $175
XYZ Corp’s method of calculating tax is a little for involved.
$250 (for 5,001-10,000 shares) + $85 + $85 + $85 (for each additional 10,000 shares = $505
Corporations using the authorized shares method will pay a minimum of $175 and a maximum of $200,000.
A second method for calculating, called the assumed par value method, can be used if a corporation’s tax bill is deemed by a business owner to be too high. In this example, a corporation tax bill is calculated by taking into account the total gross assets of a business. The math here is a little more complicated, but if the tax obligation using the authorized shares method comes in too high, this option can save a business hundreds, if not thousands, of dollars.
This tax is calculated at the rate of $350 for each $1,000,000 of total gross assets.
ABC Corp has an assumed par value of $1,200,000.
$350 (for the first $1,000,000) + $70 ($200,000 divided by $1,000,000) = $420
Corporations using the assumed par value method will pay a minimum of $400 and a maximum of $200,000.
Additional support can be offered using the Delaware franchise tax calculator.
If you made it through the math outlined above, congrats! Thankfully, it’ll get much easier from here due to the flat fee tax obligations that Limited Liability Companies and other business entities pay as part of their annual tax obligations.
A breakdown of the fees and due dates for payments are outlined below.
The state will send out an annual tax notification to your corporation's Registered Agent, informing them that your annual taxes are coming due. Once you've received your paperwork — which will include a filing number — and the calculations (if necessary) are complete, the next step is to pay the bill. As noted earlier in this blog, the process of making a tax payment is fairly simple.
There are basically four key steps involved when it comes to filing your franchise tax.
Step 1: Calculate the amount that you owe.
Step 2: Go online to the Delaware Department of State, Division of Corporations site.
Step 3: Provide your 7-digit business entity file number. (Refer to your paperwork or get it online in an entity search.)
Step 4: Fill in the cells and required information, provide your payment method and pay the tax.
That’s it! Your tax obligation for the year is now complete!
All domestic corporations are required to pay a $50.00 annual report filing fee in addition to the franchise tax. (LLCs, LPs and general partnerships formed in Delaware do not need to file an annual report with the state but are still obligated to pay the franchise tax.)
Failure to complete your filing by the due date will result in penalties, including a $200 fee and 1.5 percent monthly interest. If fees and penalties are not paid, a company risks losing its Certificate of Good Standing and the privilege of remaining in business in Delaware.
If taxes and bookkeeping are proving to be a hassle, consider looking into our complete Accounting and Bookkeeping service. The package includes a free tax consultation with quarterly bookkeeping support and other key financial services that will help meet your business’s financial needs and filing obligations.
Peter Mavrikis is an author and editor with over 25 years of experience in publishing. He has worked as the Editorial Director for Barron’s Educational Series, as well as Kaplan Test Prep, where he ran the test prep, foreign language, and study guide.
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