If you’re running a business incorporated in Delaware—or considering it—you’ve likely heard about the state’s franchise tax. Delaware is a popular choice for incorporation due to its business-friendly laws and lack of corporate income tax for companies that don’t operate in the state. However, most for-profit entities incorporated in Delaware, whether corporations, LLCs, or LPs, are subject to an annual tax. In this post, we’ll break down Delaware’s franchise tax structure, how it’s calculated, and what you need to know to stay compliant.
Who Must Pay and What Are the Rules?
Corporations:
If your business is structured as a corporation (other than a corporation that is not authorized to issue capital and meets certain additional criteria), Delaware imposes a franchise tax, which is essentially a fee for the privilege of being incorporated in the state.
LLCs, LPs, and Other Entities:
If your business is structured as an LLC or LP, Delaware keeps things simple. Instead of a franchise tax, LLCs and LPs pay a flat annual tax of $300. There’s no complicated calculation—just a straightforward fee for the privilege of being a Delaware entity.
How Is the Tax Calculated for Corporations?
Delaware provides two methods to calculate franchise tax for corporations.
- Authorized Shares Method.
- How it Works: This method is based on the number of shares your corporation is authorized to issue, regardless of how many are actually issued. The minimum tax under this method is $175.00. The tax breaks down as follows:
- Tax Rates:
- If you have 5,000 authorized shares or fewer, the tax is the minimum, $175.
- For 5,001 to 10,000 authorized shares, the tax is $250.
- For every additional 10,000 authorized shares (or portion thereof) beyond 10,000, you’ll pay an extra $85. For example, if your corporation has 15,000 authorized shares, you’d pay $250 (for the first 10,000 shares) plus $85 (for the additional 5,000 shares), totaling $335.
- Cap: The maximum tax under this method is $200,000.
- Assumed Par Value Capital Method.
- How it Works: This method calculates your corporation’s tax based on its gross assets and issued shares. You calculate an “assumed par” value by dividing total gross assets by issued shares. Then, the tax is based on the number of authorized shares. The minimum tax under this method is $400.00.
- Tax Rate:
- (i) Divide your total gross assets (as defined below) by your total issued shares (carried to 6 decimal places) to find the "assumed par” value.
- (ii) Multiply the assumed par by the number of authorized shares with a par value less than the assumed par.
- (iii) Multiply the number of authorized shares with a par value greater than the assumed par by their respective par value.
- (iv) Add the results in (ii) and (iii) to get your “assumed par value capital.”
- (v) Figure your tax by dividing the assumed par value capital, rounded up to the next million if it is over $1,000,000, by 1,000,000 and then multiply by $400.00.
- Cap: The maximum tax under this method is $200,000.
Note: For large corporate filers—those listed on a national securities exchange and with consolidated revenues and assets of $250 million or more—the franchise tax is fixed at $250,000.
Making the Right Choice for Your Business
Deciding which calculation method to use for your corporation depends on your unique structure and financial situation. If your corporation has a high number of authorized shares compared to issued shares or relatively low gross assets, the Assumed Par Value Capital Method may be more beneficial. On the other hand, if you have a low number of authorized shares, the Authorized Shares Method might work to your advantage. The key takeaway is to calculate using both methods to ensure you’re paying the lowest possible tax.
Key Terms Clarified
Authorized Shares vs. Issued Shares:
Authorized shares are the total number of shares your corporation is allowed to issue as defined in your formation documents. Issued shares are those that have actually been distributed to shareholders.
Gross Assets:
Total Gross Assets includes the total value of all your corporation’s assets, such as cash, investments, property, land, and equipment. More specifically, total Gross Assets means those “total assets” reported on the U.S. Form 1120, Schedule L (Federal Return) relative to the corporation’s fiscal year ending the calendar year of the report.
Filing Deadlines and Compliance
Corporations:
- Deadline: The Annual Report and Franchise Tax payment are due by March 1 each year.
- Penalties: Late filings incur a penalty of $200 plus interest (1.5% per month) on any unpaid tax.
LLCs, LPs, and Other Entities:
- Deadline: The Annual Report and Franchise Tax payment is due by June 1 each year.
- Penalties: Late filings incur a penalty of $200 plus interest (1.5% per month) on any unpaid tax.
Final Thoughts
Delaware’s franchise tax requirements are an essential part of doing business in one of the nation’s most popular incorporation hubs. Whether you’re a corporation or an LLC, understanding your obligations—and knowing when and how much to pay—can help you avoid penalties and maintain good standing. It’s wise to consult with a tax professional familiar with Delaware’s system to ensure you’re meeting all requirements while optimizing your tax liability.
If your company needs legal assistance, contact Gutwein Law at 765.423.7900.
