Delaware Franchise Taxes: What You Need To Know

Delaware (DE) is the preferred state of organization for many companies, and if your company is so organized, one of your primary legal obligations is to pay your annual franchise taxes. When a future investor or counter-party performs any level of diligence on your company, one of the very first items they will ask for is a Certificate of Good Standing from the DE Secretary of State, which provides proof that your company has timely paid all its franchise taxes.

Limited Liability Companies (LLCs)

DE LLCs, due on June 1st, are required to pay an annual tax of $300.00. This tax is due on or before June 1st of each year. The penalty for non-payment or late payment is $200.00. Interest accrues on the tax and penalty at the rate of 1.5% per month. Click here to pay your tax online.

Corporations (C Corp, S Corp)

The payment of franchise taxes for DE corporations, due on March 1, is a little more complicated. The tax is due on or before March 1st of each year, and the amount of the tax can be calculated according to three formulas as discussed below. As an additional resource, click here for the DE Secretary of State’s easy-to-use franchise tax calculator.

Delaware corporations must pay a franchise tax based on the lesser of three formulas — the “Authorized Shares Method”, the “Assumed Par Value Capital Method”, and the “Large Corporate Filer”. Large Corporate Filer’s are companies that are listed on a national securities exchange and have annual gross revenue greater than $750,000,000. We will ignore this method for the purposes of this article.

By default, DE calculates your tax bill using the Authorized Shares Method, which may be the more expensive option. We strongly suggest that you calculate your tax with both formulas to minimize your tax burden.

The Basics of the Authorized Shares Method

This is DE’s default method for calculating franchise taxes and is based on your corporation’s Total Authorized Shares using the following scale:

  • $175 for 5,000 or less Total Authorized Shares
  • $250 for 5,001–10,000 Total Authorized Shares
  • $85 for each additional 10 Authorized Shares
  • Maximum annual tax of $200,000

The Basics of the Assumed Par Value Capital Method

This method is based on your corporation’s Total Gross Assets (as reported on your Tax Form 1120, Schedule L), Total Authorized Shares, and Total Issued Shares, according the following formula:

  1. Calculate “Assumed Par”: Divide Total Gross Assets by Total Issued Shares and round the result to 6 decimal places.
  2. Determine “Real Par”: The actual par value of your corporation’s shares is set forth in your certificate of incorporation.
  3. (a) For all shares in which Real Par is less than Assumed Par, multiply the number of such shares by Assumed Par. (b) For all shares in which Real Par is greater than Assumed Par, multiply the number of such shares by Real Par. © For all shares in which Real Par is equal to Assumed Par, multiply the number of such shares by Real Par.
  4. Calculate “Assumed Par Value Capital” by adding the results from Step 3. If this number is over 1,00,000, round up to the nearest million.
  5. Divide the result in Step 4 by 1,000,000.
  6. Multiply the result in Step 5 by $400.

The result in Step 6 is your tax owed under the “Assumed Par Value Capital Method. The minimum tax under this method is $400 and the maximum tax is $200,000.

Examples

Let’s calculate the tax under each method if your DE corporation has authorized 10,000,000 shares of stock with a par value of $0.0001, has issued 9,000,000 shares, and has gross assets of $500,000.

Example: Authorized Shares Method

  1. Total Authorized Shares: 10,000,000 shares.
  2. First 10,000 shares = $250.
  3. Each additional 10,000 shares = $84,915 (calculated as follows: (a) 10,000,000 shares minus 10,000 shares, divided by 10,000 shares = 999; (b) 999 multiplied by $85 = $84,915).
  4. Total Tax Owed = $250 plus $84,915 = $85,165.

Example: Assumed Par Value Capital Method

  1. Assumed Par = Total Gross Assets divided by Total Issued Shares = $500,000 divided by 9,000,000 shares = $0.055556 per share.
  2. Real Par = $0.0001 per share.
  3. Because Real Par is less than Assumed Par for all shares, we multiply the Total Authorized Shares by Assumed Par.
  4. Assumed Par Value Capital = 10,000,000 shares multiplied by $0.055556 per share = $555,560. Because this number is less than 1,000,000, we do not need to round up.
  5. Divide the result in Step 4 by 1,000,000 = $0.55556.
  6. Multiply the result in Step 5 by 400 = $222.22. Because this amount is lower than the minimum tax required under this method, it will be increased to $400.

In this example, the tax owed under the Assumed Par Value Capital Method is much less than the tax owed under the Authorized Shares method. Thus, instead of paying the $85,165 that would be billed by DE, your company may pay the lower amount of $400.

Penalties for Late Payment

The interest penalty for failure to pay your taxes on March 1st is calculated at 1.5% per month on the unpaid tax balance. In addition, your taxes are typically filed along with an Annual Report, and the penalty for failure to file this report is $200.

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Originally published here by Scannavino Law LLP, mentor and friend of Labs.