Startup Tax - Avoid Overpaying Delaware Franchise Tax
What is Delaware (DE) franchise tax and how do you avoid overpaying the tax amount? Don’t worry, we are here to explain everything for you.
Almost all the startup founders registered their C-Corp in Delaware in the anticipation of having an easier process to raise investments later. Many founders try to be frugal and want to learn how to file DE franchise tax on their own. If this describes you, this article is designed perfectly for you! We at Advisori Finance, will explain everything you need to know about how to file your DE franchise tax the right way, in under five minutes.
1. Is Delaware “franchise tax” for franchises only?
Actually, the answer is no. Many founders get this confused because of the word’s choice of “franchise” tax. In actuality, it is not just for franchise owners, the DE Franchise Tax includes ALL business owners who have registered their company in Delaware. If you wish, you can think of a franchise tax as a type of state tax in this case, if it helps you memorize it.
2. When is the deadline this year for DE Franchise tax?
March 1st every year.
3. What is the link to DE franchise tax filing?
Delaware requires that ALL annual Franchise Tax reports be filed electronically. That means no paperwork. Here is the link Click here: Delaware Franchise Tax.
4. What files do you need before you start filing DE tax online?
Balance sheet
Cap table
5. How much do you owe in DE tax?
There are two methods to calculate the amount of DE Franchise Tax you owe:
Authorized Shares Method
Assumed Par Value Capital Method
Your company pays one of the two methods, whichever calculates to the least amount. So, make sure that you calculate the tax amount under both methods and pick the one that shows the least amount! Here is how to do the calculation under the two methods:
The Authorized Shares Method:
If your company has 5,000 shares or less, it pays the minimum tax of $175. For companies with 5,001 to 10,000 shares, the tax is $250. For companies with over 10,000 shares, the tax is $250 plus $85 for each additional 10,000 shares or portion thereof. The maximum annual tax is $200,000.
To summarize, if your company hasn’t issued many shares, it is cheaper to use the Authorized Shares method, and will be your preferred method to calculate your DE Franchise Tax
The Assumed Par Value Method:
For corporations using the Assumed Par Value Method, the minimum tax is $400. To use this method, the corporation must report its total number of issued shares (including treasury shares) and total gross assets. The tax rate using this method is $400 per $1,000,000 or part thereof of assumed par value capital. The maximum annual tax is $200,000. You are also required to attach a copy of your Balance sheet when using this method, so don’t forget.
To summarize, if your company issued a lot of shares but doesn’t have too much assets, it is cheaper to use the Assumed Par Value method.
Is there a tax calculator you can use, you ask? Luckily the answer to the question is a sound yes. You can calculate your estimated tax owed with the state of Delaware’s Franchise Tax Calculator.
6. What if I missed the March 1st deadline?
Unfortunately, any late filing is subject to a $200 penalty, plus interest at 1.5 percent per month. On top of that, Delaware will not issue Good Standing Certificates for your company. Please note that after two years of non-filing and non-payment, the corporation’s Certificate of Incorporation will be revoked.
7. Your company is pre-revenue, do you still need to pay taxes?
You still need to file an annual report and pay the tax: Yes, seriously, you are still required to file the annual report and pay the Franchise Tax even if the corporation never engaged any business. Rules are rules!
Note: If your company is a LLC, you will need to pay the annual Delaware LLC tax of $300, which is due on June 1st of each year.
Conclusion:
Hopefully we answered some of your questions in the process. If you still have any questions, feel free to drop us a line!
