Ensure Legal Compliance and Maintain Good Standing Status
Starting a new business is an exciting endeavor, but it also comes with many financial obligations. One of these obligations is the payment of franchise taxes, which can be a confusing and overwhelming process. If you are a startup founder who has incorporated your business in Delaware, you are required to file an annual report and pay franchise taxes to maintain your corporation’s legal status. In this blog post, we will explain how Delaware franchise taxes are calculated and provide an overview of the filing deadlines and procedures.
What are Delaware franchise taxes?
Delaware is a popular state for incorporating businesses due to its business-friendly laws and tax structure. Delaware franchise taxes are a form of tax that Delaware-based corporations must pay annually to the state. Franchise taxes are not unique to Delaware and are a way for a state to generate revenue from businesses operating within its borders.
Delaware franchise taxes are paid annually, and failure to pay can result in penalties and interest charges. It is important for startup founders to understand the tax requirements and plan accordingly to avoid any negative consequences.
How are Delaware Franchise Taxes Calculated?
Delaware franchise taxes are calculated based on the corporation’s authorized shares or a formula using the corporation’s par value and gross assets, which includes assets such as cash, accounts receivable, and inventory. The two methods of calculation are the Authorized Shares Method and the Assumed Par Value Capital Method.
Authorized Shares Method:
The Authorized Shares Method is the default method of calculating franchise taxes for Delaware corporations. The franchise tax fee is based on the number of authorized shares that the corporation has on file with the Delaware Secretary of State. The tax rate is $175 per 10,000 authorized shares. For example, if a corporation has 100,000 authorized shares, the franchise tax fee would be $1,750. When you receive your annual tax notice from Delaware, this is the method that has been used to calculate the amount of taxes due.
Assumed Par Value Capital Method:
The Assumed Par Value Capital Method is an alternative method of calculating franchise taxes for Delaware corporations. This method is typically used for companies with shares that have a very low par value and, in many cases, will yield a smaller tax liability for startups. Under this method, the franchise tax fee is based on the corporation’s assumed par value capital, which is equal to the corporation’s total gross assets multiplied by the ratio of issued shares to authorized shares. The tax rate is $400 per $1,000,000 of the assumed par value capital. For example, if a corporation has $1,000,000 in assumed par value capital, the franchise tax fee would be $400. The exact calculation of Delaware franchise taxes can be complex and may vary based on a company’s specific circumstances. Startup founders should consult with a tax professional or legal counsel to ensure they are accurately calculating and paying their franchise taxes.
When are Delaware franchise taxes due?
All Delaware corporations must file an annual report and pay their franchise taxes by March 1st of each year.
Delaware imposes a penalty for late payment of franchise taxes. The penalty is typically 1.5% of the unpaid tax for each month that the tax is overdue, up to a maximum of 15% of the total tax due. Failure to file the annual report and pay the franchise taxes by the deadline could also result in the potential loss of good standing status.
It is important for startup founders to mark this date on their calendars and plan accordingly to avoid any late fees or penalties.
Filing Procedures:
The Delaware Division of Corporations offers an online payment system that allows businesses to pay their franchise taxes electronically. To use this system, businesses must first register for an account with the Delaware Division of Corporations.
Here are the steps to file your annual report and franchise taxes:
- Visit the Delaware Division of Corporations website and login into your account.
- Select the “File Annual Report” option and complete the required fields.
- Review your report for accuracy and submit it along with payment for your franchise taxes.
- Print a copy of your receipt for your records.
This can be a tedious process and GwC is happy to assist with this annual obligation.
In conclusion, as a Delaware corporation, it is essential to understand how franchise taxes are calculated, the two methods of calculation, and the filing deadlines and procedures. By following the steps outlined in this blog post, you can ensure that you are in compliance with Delaware law and maintain your corporation’s good standing status. If you have any questions or need assistance with filing your annual report and franchise taxes, consult with a GwC attorney or tax professional.
