File Now! 7 Simple Steps to Filing Your Delaware Franchise Tax
Are you a startup with Delaware C-corp structure?
Every year on March 1st, all the startups with the DE C-corp structure have to pay the franchise taxes. To many founders, this task can seem daunting. But with a little guidance and clarification from us, you will be able to navigate this task like a pro.
Here are the seven key points that you will need to know when filing DE franchise taxes:
1. Delaware “franchise tax” is the state tax
Even though it is called DE “franchise” tax, it is actually the state tax. Confusing right? The DE Franchise Tax is not just for the franchise owners; it is the state tax for all the businesses that have registered in the state of Delaware.
2. The deadline for DE Franchise tax is always the March 1st
If you forgot to file the report and pay the estimated franchise taxes, you will have a penalty of $200 plus 1.5% interest per month on tax and penalty.
Additionally, Delaware will not issue Good Standing Certificates for your company. After two years of non-filing and non-payment, your corporation’s Certificate of Incorporation will be revoked. With this in mind, we recommend that businesses pay DE franchise tax on time, to avoid any headaches in the future.
For companies registered as LLCs, the deadline to pay the annual Delaware LLC tax is June 1st, in the amount of $300.
3. Pay and file DE franchise tax online
The Delaware division of corporations requires annual franchise tax reports be filed online. That means we don’t have to mail offices to mail the files. This is different from many other tax filings! Click here: Delaware Franchise Tax to file online.
4. $50 fee for filing the annual taxes report
In addition to the taxes, you will also need to pay a filing fee. Effective September 1st, 2019, the fees for filing an Annual Report or an Amended Annual Report are:
Exempt Domestic Corporations – $25.00 USD
Non-Exempt Domestic Corporations – $50.00 USD (For most businesses.)
5. Financial statements you need for filing DE franchise tax:
Balance sheet: A financial statement that reports a company's assets, liabilities and shareholders' equity at a specific point in time, and provides a basis for computing rates of return and evaluating its capital structure.
Cap table: A capitalization table, also known as a cap table, is a spreadsheet or table that shows the equity capitalization for a company.
6. Pre-revenue startups still have to pay taxes
It might not be the news that you want to hear, but yes, pre-revenued (meaning the startup has yet to generate any sales) businesses are still required to file the annual report and pay the franchise tax. If your company did not engage in any business for the entirety of last year, you still have to file and pay for the taxes.
7. Compare the two tax calculation methods and pick the lesser amount to pay.
The DE division of corporations accepts two methods of calculation:
Authorized Shares Method
Assumed Par Value Capital Method
The good news is that you can pick one of the two methods to use, whichever method gives you the lesser amount to pay. Amazing!
Under these two methods of calculation, the minimum tax is $175 using the Authorized Shares Method; and $400 the minimum using the Assumed Par Value Capital Method. Here is how to do the calculations 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.
In short, if your company hasn’t issued many shares, it is cheaper to use the Authorized Shares method.
The Assumed Par Value Method:
For companies using the Assumed Par Value Method, the minimum tax is $400. To use this method, you 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. In addition, you are required to upload a copy of the 2020 balance sheet.
In short, if your company issued a lot of shares but doesn’t have much assets yet, it is cheaper to use the Assumed Par Value method.
To make things even easier, the DE division of corporations has a calculation sheet to compare which method is cheaper for you. Here is the link to Delaware’s Franchise Tax Calculator.
Takeaway:
Unlike IRS federal taxes, DE franchise taxes are relatively easy to prepare. Follow the instructions and links above, and you will get it done like a pro! If you still have any questions, send us an email. We would love to hear from you!
