For these reasons, more than a million businesses are incorporated in Delaware, including more than half of all publicly traded and Fortune 500 companies.
All Delaware-incorporated businesses must, however, still pay the annual franchise tax, submit an annual report, and pay a filing fee. Here’s how to figure out how much you need to pay, how to file, and what happens if you don’t.
What are Delaware franchise taxes?
A franchise tax, sometimes called a privilege tax, is a fee you pay for the privilege of doing business in a certain state.
The Delaware franchise tax is collected every year by the Delaware Department of State. They mail your official business address an annual reminder to pay your franchise taxes.
In addition to paying the franchise tax, businesses incorporated in Delaware must also file an annual report and pay a small filing fee.
Who has to pay the franchise tax?
You must pay the Delaware franchise tax if, for example, your Delaware business is one of the following:
- C Corporation
- S Corporation
- LLC
- LP
- General Partnership
Certain exempt domestic corporations like charities, civic organizations and religious organizations do not have to pay the franchise tax. However, they must still file an annual report and pay the filing fee.
How Bench can help
If you’re trying to figure out if you owe Delaware franchise tax, Bench can help. We provide small businesses with a tax filing and bookkeeping solution. Our all-star team does your monthly bookkeeping for you and sends your financials to trusted tax professionals for a stress free filing experience. We file both your state and federal business taxes for you.
Plus, our tax advisors can help you make the most of your filing situation. Learn more.
How much do I owe in Delaware franchise taxes?
How much you pay depends on which method you use to calculate your Delaware franchise tax:
- the Authorized Shares method or
- the Assumed Par Value Capital method
Delaware lets you use whichever method amounts to the least tax owed.
The Authorized Shares method
Under this method, your franchise tax is based on how many shares your corporation has authorized.
Keep in mind, this number could be different from the number of shares your company has actually issued. Your authorized share number is the maximum number of shares your corporation could sell based on your corporate bylaws or charter.
If your company has authorized 5,000 shares or fewer, your total Delaware franchise tax amount is $175.
If you’ve authorized 5,001 to 10,000 shares, your franchise tax is $250.
For every additional 10,000 shares authorized after that, you pay another $85 in franchise tax, up to a maximum of $200,000.
The Assumed Par Value Capital method
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.
- First, divide your business’ total gross assets (i.e. the “total assets” figure you reported on Form 1120, Schedule L of your federal tax return) by the total number of issued shares. The resulting number is called your assumed par.
- Multiply your assumed par value by the total number of authorized shares with a par value less than assumed par.
- Total up the par value of all authorized shares with a par value higher than assumed par.
- Add the results of steps #2 and #3, round the resulting figure up to the next million, and then divide the resulting number by $1,000,000.
- Multiply the resulting figure by $400 to get your franchise tax.
The minimum tax you pay under this method is $400, and the maximum is $200,000.
The Assumed Par Value Capital method: an example
Let’s imagine a Delaware-incorporated company reported total gross assets of $1,000,000 on their federal taxes this year.
Let’s also imagine it has authorized and issued 100,000 shares at a par value of $2.00 each, and 100,000 shares at par value of $10.00 each. Let’s also assume the number of shares issued and authorized is the same for simplicity’s sake.
To calculate this company’s Delaware franchise tax using the Assumed Par Value Capital method, we have to do the following:
- Divide total gross assets ($1,000,000) by the total number of issued shares (100,000 + 100,000 = 200,000). $1,000,000 divided by 200,000 equals $5, which is our assumed par.
- Now we have to identify all the authorized shares that have a par value below assumed par we calculated. In this case, it’s 100,000 shares—all of the $2.00 ones. Then we multiply our assumed par ($5) by 100,000 to get $500,000.
- Now we total up the par value of all authorized shares with a par value higher than assumed par. In this case that’s all the $10 shares, and $10 x 100,000 = $1,000,000.
- Now we add up the results of steps 2 and 3: $500,000 + $1,000,000 = $1,500,000. Then we round up to the nearest million ($2,000,000) and divide the result by $1,000,000 to get 2.
- Finally, we multiply 2 by $400 to get $800, which is our total franchise tax.
Delaware franchise tax calculator
Don’t worry if the above calculations seem a bit complicated. Delaware provides a handy spreadsheet-based calculator you can download here. (To use it, right click on this link, ‘save as,’ then open the .xls file using a spreadsheet app on your computer like Excel or Numbers.)
It can calculate your franchise tax using both the Authorized Shares method and the Assumed Par Value Capital method.
Franchise taxes for partnerships and LLCs
In addition to corporations, Delaware limited liability companies (LLCs), general partnerships, limited partnerships (LPs) and limited liability partnerships (LLPs) must also pay franchise taxes.
Calculating those is a bit easier—they all follow this flat rate schedule:
What about the annual report?
Delaware companies must submit an annual report to the Delaware Department of State and pay a $50 filing fee, all of which should be done at the same time they pay their franchise tax. (For certain exempt corporations, the filing fee is $25.)
The annual report will ask you for the following information:
- Your Federal Employer Identification Number (EIN)
- Your company’s physical address
- Names and addresses for all company officers, and at least one director
- The name, title and address of the person filing the report
How do I pay my franchise taxes and file the annual report?
Companies based in the United States must pay their franchise tax and file their annual report electronically. You can do so by following these steps:
- Go to https://corp.delaware.gov/paytaxes/
- Enter your 7 digit Business Entity File Number. (You can look yours up here.)
- A web form will ask you for all of the annual report information mentioned above
- Pay your tax and filing fee by credit card or electronic debit payment
When are my payments due?
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.
If you owe $5,000 or more in franchise taxes, you’ll make quarterly payments instead of one lump sum payment according to the following schedule:
What happens if I don’t pay?
You’ll incur a $200 penalty if you don’t file an annual report on or before March 1. You’ll also pay 1.5% per month applied against any unpaid tax and penalty.
