The second method is the “assumed par value” method and is a more complicated formula based on shares issued and the company’s gross assets. This second method often results in lower tax bills for VC-backed startups. They may decide to start with a minimum stock structure which is 1 to 5,000 shares of stock. With this stock structure, the Delaware Corporation will pay a $225 Delaware Franchise Tax each year which includes the annual report fee. This will allow for the lowest annual fees which is sometimes beneficial for bootstrapped start-up companies. But what if you plan to bring aboard investors in the future and the need for more authorized shares is required?
When you sign up for TaxPass you get a dedicated Tax Accountant and shared slack channel. Manually compiling data from all your social media takes hours, and your reports are full of errors. Sign up below to get the Delaware Franchise Tax Calculator so you can see an estimate of how much you will owe Delaware for your 2021 Annual Franchise Tax.
LLC/LP’s benefit by only having to pay a $300 flat fee for Franchise Tax (not including any filing fees from a Registered Agent). The content and links provided on this page are for informational purposes only and not for the purpose of providing legal or tax advice. Viewing this page does not establish an attorney-client relationship. You should consult with a qualified legal professional for advice regarding any particular issue or problem.
What other taxes do Delaware corporations need to file/pay?
Most aspiring companies end up incorporating in Delaware to reap the benefits of robust case law and a pro-business attitude. But being a Delaware corporation also comes with franchise tax liability, each and every year. The key takeaway here is that the Assumed Par Value Capital Method will typically result in low taxes until the company has substantial assets.
The tax rate under this method is $400.00 per million or portion of a million. If the assumed par value capital is less than $1,000,000, the tax is calculated by dividing the assumed par value capital by $1,000,000 then multiplying that result by $400.00. To use this method, you must give figures for all issued shares(including treasury shares) and total gross assets in the spaces provided in your Annual Franchise Tax Report. The tax rate under this method is $350.00 per million or portion of a million. If the assumed par value capital is less than $1,000,000, the tax is calculated by dividing the assumed par value capital by $1,000,000 then multiplying that result by $350.00.
Now that we know what the Delaware franchise tax actually is, and who has to pay it — in essence, everyone with a business in Delaware — let’s look at what businesses need to do to figure out how much they owe. Even though Delaware is the second smallest state in size (after Rhode Island) and falls in at number 45 when it comes to population, this state ranks high when it comes to business formations. Close to three-quarters of all Fortune 500 Journal Entries Examples Format How to Explanation companies are incorporated in Delaware, including the 1.6 million businesses that have formed in the state as of 2020. If you’ve authorized 5,001 to 10,000 shares, your franchise tax is $250. The Assumed Par Value Capital Method is complex, but companies are welcome to use a franchise tax calculator to make the process easier. Late payments incur a penalty fee automatically included in the franchise tax notice, regardless of the circumstances.
Use the calculation method in our estimator above to estimate how much you likely owe. Your company will likely need to use the assumed par value calculation method instead of the authorized share method of calculation. Most of our startups pay between $400 – $10,000 in DE Franchise taxes.
Calculations for Franchise Tax due are done using the Authorized Share Method on the annual report. For more information on Delaware franchise tax, click here for the official state of Delaware information page. If you have questions about your startup company (including franchise taxes), please feel free to reach out to us at Again, this is based on authorized shares and not outstanding shares.
Delaware Franchise Tax: How to Calculate and Pay
This method is a bit more complicated, because it involves calculating your business’s assumed par value—i.e. The actual value of your business as estimated by the State of Delaware. If your due date falls on a Saturday, Sunday, or legal holiday, you may file your return on or before the next business day. A penalty of $200 is assessed for failure to file the Annual Franchise Tax report by March 1st, plus interest of 1.5% each month on any unpaid tax and outstanding penalty fee. This website is using a security service to protect itself from online attacks.
If the company has 5,000 shares or less, then the company pays the minimum tax of $175. If they have authorized between 5,001 and 10,000 shares, the tax goes up to $250. Thereafter, the tax increases by $75 for each additional 10,000 shares or portion thereof (with a maximum tax of $180,000). In order to reduce your liability for the current year, you can try recalculating your taxes using the State’s alternative tax calculation, the “assumed par value capital” method. This calculation takes into account the number of shares issued by the corporation, as well as the gross assets of the company. Because this calculation requires information that the Secretary of State’s office does not have, this can only be done if the company initiates this calculation themselves.
The state will send out an annual tax notification to your corporation’s Registered Agent, informing them that your annual taxes are coming due. Once you’ve received your paperwork — which will include a filing number — and the calculations (if necessary) are complete, the next step is to pay the bill. As noted earlier in this blog, the process of making a tax payment is fairly simple. Delaware’s franchise tax is pretty straightforward for some business entities as it uses a flat fee, but it is more complex for others. One example can be seen in the franchise tax assessment for corporations. In fact, even if your business has been inactive for the year, you will still need to pay a franchise tax.
The Assumed Par Value Capital method: an example
In this example, a corporation tax bill is calculated by taking into account the total gross assets of a business. The math here is a little more complicated, but if the tax obligation using the authorized shares method comes in too high, this option can save a business hundreds, if not thousands, of dollars. In addition to paying taxes, you are required to file an annual report. The annual report includes basic information, like your company address and your board members or officers.
- As discussed above, the tax on 20 million of authorized shares is $170,165 ($250.00 plus $169,915.00[$85.00 x 1999]).
- It is a requirement that all Delaware corporations file an annual report.
- If the company has 5,000 shares or less, then the company pays the minimum tax of $175.
Typically, this corporation is better off to use the second calculation option. There are several variables that enter into the Assumed Par Value Capital Method including the corporation’s gross assets, issued shares, number of authorized shares and their par value. Delaware provides a Microsoft Excel worksheet that can be used to show the tax based on various assumptions. The tax under this method is $400 per $1,000,000, or portion thereof, of assumed par value. You must file your annual report if your business is a corporation and pay your franchise tax and filing fee by March 1. All LLCs, Limited Partnerships, and General Partnerships formed in Delaware are required to pay the annual franchise tax by June 1.
How Are Franchise Taxes Calculated in Delaware?
If your APVC is $1,000,001, you do not owe $350, you must round up to $2,000,000, which means you owe $700. While we cannot respond to every inquiry, we may reach out to seek further clarification on any suggestions or technical issues you’ve submitted. For more help with tax and compliance matters, see How can my corporation get help complying with Delaware’s requirements?.
In addition to the franchise tax, there is also a $100 filing fee for the annual report. You can calculate your corporation’s franchise tax using the Assumed Par Value Capital Method when you file the annual franchise tax report on the Delaware Division of Corporations website. Simply report your corporation’s total gross assets and the number of shares issued when completing the online filing. Form 1120 Schedule L for tax year ending prior to filing the Delaware franchise tax report. Thus, for a calendar-year taxpayer, total assets reflected in a corporation’s March 1, 2021 Delaware franchise tax filing should tie to Form 1120, Schedule L for the tax year ending in 2020.
When considering the last 2 bullets above, an LLC or LLP that is treated as a partnership for federal income tax purposes will be treated as a partnership for New York State tax purposes. Companies can file the Annual Franchise Tax Report on their own, or partner with a registered agent, attorney, or accountant to do so. If you choose file it on your own, (or if you want insight into the process), start with the Delaware tax calculator. Then move on to the DE Annual Report and Tax Instructions page to file your Annual Report and pay your taxes. As we’ve previously discussed, forming a Delaware corporation for a cannabis startup may be a good idea. One issue that Delaware corporations need to be aware of is how that state calculates its franchise tax.
If the federal income tax return is on extension, other financial data will need to be used for total gross assets. Interests in entities that are consolidated with the Delaware reporting company must be included in “total gross assets” at a value determined in accordance with GAAP. If DE sent your startup a huge tax bill for their annual franchise tax, don’t panic – you can likely reduce your Delaware Franchise Tax by using an alternative calculation method.
An Overview of the Delaware Franchise Tax
Just want to highlight that Justin Damiani is one of the BEST customer support reps I have ever interfaced with. You could do a lot worse than sending him an email to get your business started & sorted with HBS. At any moment, executives or team members may own public or private stock in any of the third party companies we mention. Help us have a productive first consultation by providing some additional information. Also at Kruze, another option is working with a PEO; that is how you “Incorporate in a state.” Hope that helps, thanks.
Form 1120, Schedule L tax form for the same year that the Company is filing its annual report. If the Company has not filed its taxes for that year yet, then a number from a recent balance sheet will suffice and can be amended later if necessary. The par value used to compute the tax is the greater of the “assumed par value” or the actual par value listed in the certificate of incorporation.
Annual Report Franchise Tax:
ABC Corp has 3,200 authorized shares and pays a franchise tax of $175, while XYZ Corp has 32,000 shares and pays $505. This article discusses how the tax is calculated, filing and payment due dates and other requirements applicable to for-profit C corporations that incorporate in Delaware. It’s important for founders to remember that the Delaware Franchise Tax website defaults to the largest tax bill possible when you first log into the site. That’s because the state of Delaware doen’t know how many outstanding shares you have or what your asset base is until you fill out that information. If you’re not working with an accounting firm, you’ll need to total up your asset base and enter that number. Then you need to hit the “recalculate” button and wait while the system generates a new balance.