More than a million businesses have made Delaware their legal home, including more than 65% of Fortune 500 companies. Delaware offers the most advanced and flexible business formation statute in the U.S., which is why it's so popular with businesses. 

Yet, all companies in Delaware, regardless of size, need to pay the Delaware franchise tax. If you are unfamiliar with this tax, keep reading to learn everything you need to know.

Let's dive in.

Sign up for a demo and discussion of how Zeni's finance professionals can make tax season a breeze for your company and help you easily manage every aspect of your company's finances.

What Is the Delaware Franchise Tax?

Contrary to its name, the Delaware franchise tax doesn't mean your business is a franchise. Instead, it's a tax the state of Delaware charges for the right to own a Delaware company. 

The tax doesn't relate to your business's income or activity. Essentially, you pay a fee to maintain your company's good standing status. You can think of this tax as a privilege fee. It prevents administrative dissolution. 

All businesses in the state need to pay their Delaware franchise taxes.

In addition, corporations need to complete an annual report that lists the following:

  • Company's physical address
  • Names and physical addresses of all directors
  • If there are officers, the name, title, and physical address of one of the officers

How to Calculate Your Delaware Franchise Tax 

LLCs and limited partnerships (LPs) pay a flat rate of $300 yearly for their franchise tax.

Non-stock and non-profit companies are exempt from the franchise tax and any penalties. However, these companies still need to file and pay the annual report fee of $25 each year. 

Businesses operating outside of Delaware but registered to do business in the state must pay a $125 registration fee.

If your business is a corporation, your corporation type and the number of authorized shares your company has will determine your franchise tax fee. The total cost includes the annual report fee and the tax fee:

  • Corporations with 5,000 authorized shares or less are minimum stock corporations. The report fee is $50, and the tax is $175 ($225 in all) per year for these corporations.
  • Corporations with 5,001 authorized shares or more are maximum stock corporations. The report fee is $50, but the tax is between $200 and $200,000. You'll need to calculate your tax fee if you're a maximum stock corporation.

See Also: 4 Key Considerations For Finding The Right Startup Tax Advisor

Delaware Franchise Tax Calculation Methods

There are two calculation methods maximum stock corporations can follow. Delaware allows you to pay the lower of the two methods. So if you receive a high tax bill, double-check the numbers using the second method.

Method One: Authorized Shares

This method calculates your franchise tax fee based on the number of your company's authorized shares. As mentioned, for corporations with 5,000 shares or less, the fee is $175. 

For corporations with 5,001 to 10,000 shares, the fee is $250. 

For each additional 10,000 shares (or portion thereof), the fee is $85. The maximum tax amount is $200,000. 

So if your company has 50,000 shares, the fee is $590. 

After calculating your tax fee, don't forget to add the $50 annual report fee. 

This is the method the state uses to calculate your tax bill. Thus, calculating your fee with the following method could help lower the cost.

Method Two: Assumed Par Value Capital

To use the assumed par value capital method, you need your company's total gross assets, which you reported on Form 1120, Schedule L. You also need the total number of issued shares. 

The calculation method is complex, so you need to use a Delaware franchise tax calculator to help you understand how much you owe. 

Using this method, the minimum payment is $450, including the annual report fee. 

Franchise Tax Due Dates

The due date for your franchise tax depends on your company type. 

Corporations must pay the tax by March 1 each year. If your corporation fails to pay the tax on or before March 1, there is a $200 late penalty and a 1.5% monthly interest fee.

The due date for foreign corporations is June 30. The late penalty is $125.

LLCs and LPs must pay the franchise tax by June 1 each year. Failing to pay by this date will also result in a $200 fine with a monthly interest fee of 1.5%.

The tax due by each day is for the previous calendar year. This is called being taxed in arrears. You are responsible for paying the franchise tax even if you didn't conduct business or lost money.

If your business has ceased operating, you must adequately close your company to end your responsibility of paying the franchise tax.

See Also: Startup Tax Filing Extensions: Everything You Need To Know

How to File and Pay Your Franchise Tax

Your business can file and pay its franchise tax online. Here are the three easy steps to follow:

1. Calculate your fees

2. Enter your business information

3. Pay the tax

You've already learned how to calculate how much your franchise tax is. 

Under company information, you will need to enter your Business Entity File Number. You also need to enter to following:

  • Federal Employee Identification Number (EIN)
  • Corporation's physical address
  • Names and addresses of all corporate directors and officers 
  • Name, title, and address of the person completing the filing

Next, pay the required fees. You can pay using an electronic check or credit card. 

Foreign corporations cannot file online and need to mail in their documents.

What Happens After Payment?

After paying your franchise tax, you can request a Certificate of Good Standing from the Delaware Secretary of State. The certificate certifies:

  • The date your company was formed in Delaware
  • The company is current with all Delaware taxes
  • The company is in good standing

The certificate is separate from the annual report, so it will not mention internal company information.

How Zeni Can Help Your Business With Its Delaware Franchise Tax

While it's possible to pay a registered agent to handle your company's Delaware franchise tax, when you use Zeni, you won't have to worry about yet another service. 

Zeni is an all-in-one financial platform that can take care of your bookkeeping, invoicing, taxes, and more. Customers enrolled in a Zeni Bookkeeping, Full Service, or CFO Plan can access Zeni Tax for a low annual fee. 

 

That includes helping you maintain accurate records for your business year-round, and managing your annual tax preparations and filings — including the R&D Tax Credit when applicable.

Let us show you how it all works. Book a demo with a Zeni Tax specialist today.