What is the Delaware annual “Franchise Tax”?
The Delaware “Franchise Tax” is simply the annual fee that Delaware entities are required to pay for the right or privilege to exist as a Delaware company. The name “franchise tax” is misleading both because (1) it isn’t a “tax” in the typical sense of the word, as it is not impacted by amount of income or company activity, and (2) it applies to all entities, regardless of whether you have a “franchise” model. It really is just an annual fee required by Delaware to maintain the good standing status of your entity.
(Read Delaware’s official definition franchise tax here.)
What is the Delaware annual franchise tax report?
The Delaware “Annual Report” is just a report that Delaware requires be submitted every year by entities organized or incorporated in Delaware to remain in good standing status.
(Still wondering if you need to be an LLC or a C-Corp? Read this.)
What information is needed for filing my Delaware Annual Report?
Before filing your Annual Report, you’ll need to collect the following info: (1) total shares issued by your company (no need to include options), (2) the value of the gross assets of your company as of the end of the year for which the annual report is being filed (this should match up with the amount reported on the IRS Form 1120, Schedule L), (3) your company’s principal business address (not a P.O. box and not your Registered Agent’s address), (4) the names and addresses of at least one officer of your company, and (5) the names and addresses of all company directors.
(Haven’t made a C-Corp yet? Check out our Ultimate Guide.)
How is Delaware franchise tax calculated?
For Delaware corporations, the minimum Delaware Franchise Tax for most entities was increased to $400.00 beginning in 2018, but they also charge a mandatory $50.00 “Annual Report fee”, so the effective annual Delaware fees are $450.00. You may owe more than this amount depending on various factors, but for most early stage technology startups, this is what you will owe.
For Delware LLCs or LPs, Delaware requires a flat $300 amount.
Why did Delaware send me a notice saying I owed an amount higher than $450.00?
There are two ways that Delaware is permitted to calculate your annual Franchise Tax, and you are allowed to use whichever calculation will result in the lower fee. The easiest way for them is based on the number of shares you have authorized (called the “Authorized Shares Method”). The other way is based on the number of shares issued and the gross asset value of the Company (called the “Assumed Par Value Method”).
Because Delaware doesn’t know how many shares your company has issued or the gross asset value of your company at any given time, they always send you an invoice using the Authorized Shares Method. Because most companies have a large number of shares authorized, this will almost always result in a surprisingly high franchise tax (often between $10K and $100K).
Startups should RARELY pay more than $450.00 in Delaware franchise taxes, at least until their assets get over $1,000,000. Savvi’s registered agent service is included in all paid Savvi subscriptions, we will file your Annual Report for you and always ensure that your annual fee is being calculated using the cheapest method possible.
How do I pay my Delaware franchise tax?
Collect the applicable information, and then submit the info and a credit card here. If you use Savvi’s registered agent service (included with all paid Savvi subscriptions), we will collect the information and submit it for you. We will also be on top of making sure you get everything submitted on time and don’t incur any late fees.
(Or go to the Delaware site here to get started.)
When is the deadline for filing my Annual Report and Franchise Tax?
For Delaware corporations, Annual Reports and Franchise Taxes are due every March 1st. For LLCs, it is due on the June 1st.
Franchise Taxes are paid in arrears, meaning that you pay them for the previous year, which matches up with the year for which the Annual Report is being filed. So the 2019 Annual Report and Franchise Taxes for Delaware Corporations are due on March 1, 2020.
If I formed my entity later in the year, do I still have to pay the full amount?
Unfortunately, yes. Delaware does not reduce the amount owed based on the amount of time that your entity existed during the applicable year. If your entity existed at any time during any calendar year (even if you formed it on December 31), you must pay the full franchise tax amount for that entire year, and file an annual report for that year.
What happens if you don’t pay Delaware franchise tax?
Failure to file an Annual Report and pay the applicable Franchise Tax by the applicable deadlines will result in the entity falling out of good standing with Delaware, in addition to being assessed a late fee equal to $200 plus a 1.5% monthly penalty.
Is the Delaware Franchise Tax the same as or included in my annual Registered Agent fee?
No, the Delaware Franchise Tax and annual fee charged by your Delaware registered agent are are two separate and unrelated fees. The annual Franchise Tax is imposed by the state of Delaware, while the annual Registered Agent Fee is paid to whomever is acting as your registered agent in Delaware. If you use Savvi’s registered agent service, your annual Registered Agent Fee will include the cost of Savvi filing your Annual Report for you, but you will still need to complete the Annual Report task on the Savvi Legal platform and submit the $450 Franchise Tax every year in addition to the Registered Agent Fee. Oh, and did we mention you get Carta for free when you use Savvi?