Delaware franchise tax: why the bill is high and how to lower it

Why does a Delaware corporation's notice show such a large tax?

Delaware initially assesses a corporation on authorized shares: the shares its charter permits it to issue, including shares it has never issued. That can produce a large notice for a company with a large share authorization and modest assets. The notice goes to the Delaware registered agent, and the amount may change when the corporation files its annual report with the figures required for the other method (Delaware Code, §§ 502(c), 503(b); Division of Corporations tax questions).

First check that the notice names your company and its authorized shares correctly. If the notice seems unfamiliar, use the Division's filing site rather than payment instructions in an unsolicited message; Delaware warns about deceptive annual report solicitations.

How does Delaware calculate a corporation's franchise tax?

Delaware compares two methods for an ordinary stock corporation and charges the lower applicable amount. The authorized shares method counts charter-authorized shares. The assumed par value capital method uses authorized and issued shares, their par values, and gross assets; the corporation must supply the required figures on its report to use it (Delaware Code, § 503; Division calculation guide).

The ordinary maximum is $200,000. A corporation designated a large corporate filer has a different fixed tax; this is an exception for qualifying listed companies, not a way to recalculate an ordinary startup's bill (Division annual report information; Division tax questions). The separate annual report fee for a non-exempt domestic corporation is $50, so the total payment can exceed the franchise tax alone (Division annual report information).

For stock with no par value, Delaware says the authorized shares method always gives the lower tax. A company with both par and no-par classes needs the statutory calculation for each class before comparing methods (Division calculation guide; Delaware Code, § 503(a)).

How do I recalculate the bill using assumed par value capital?

For a Delaware corporation with par value shares, divide total gross assets by all issued shares, including treasury shares, to find assumed par value per share. For each authorized par value class, multiply its authorized shares by the higher of that class's stated par value and the assumed par value. Add the class results, then apply Delaware's rate and $400 minimum (Division calculation guide; Delaware Code, § 503(a)).

1. Confirm authorized shares and par value for each class from the certificate of incorporation and any amendments.
2. Count shares actually issued, including treasury shares, from the stock ledger or capitalization table. Do not substitute authorized shares for issued shares in the denominator.
3. Reconcile gross assets to the corporation's year-end Form 1120 Schedule L. Delaware uses the fiscal year ending in the calendar year covered by the report (Delaware Code, § 503(i)).
4. Enter issued shares and gross assets in the online annual report, compare the calculated tax with the authorized shares result, and keep the supporting records (Division calculation guide).

If issued shares or gross assets are zero, do not force the formula; contact Delaware's Franchise Tax Section for the filing calculation. If the federal return or its balance sheet is missing, reconstruct and reconcile the asset figure before using it. The IRS instructions let some small corporations omit Schedule L from the federal filing, while Delaware's statute points to Schedule L; get the reporting basis confirmed before submitting a figure in that situation. A midyear charter amendment changes the authorized stock for part of the year, so Delaware prorates the calculation and requires issued-share and asset figures within 30 days of the amendment (Division calculation guide; Delaware Code, § 503(e)).

Even a corporation with issued par-value shares but no assets normally reaches the $400 minimum under this method; an absence of assets is not a franchise tax exemption (Division calculation guide).

Already filed or paid the higher assessment? Ask the Franchise Tax Section how to correct that year's report or assessment. A corporation claiming an error may petition for a reduction or refund by March 1 of the second calendar year after the tax year. If Delaware sends a notice of additional tax, pay or petition for review within 60 days of the notice (Delaware Code, § 504(d)). If the correction creates a credit, use the Division's refund process.

What records do I need to check the calculation?

Gather the charter, share records, and balance sheet before changing a Delaware corporation's tax calculation. The annual report is a signed filing, and a knowingly false statement can carry serious consequences (Delaware Code, § 502).

Gross assets are assets, not revenue, profit, or cash alone. Delaware defines them by the total assets reported on Form 1120 Schedule L, with special reconciliation for consolidated returns (Delaware Code, § 503(i)).

When is the tax due, and what happens if I pay late?

A Delaware domestic corporation files its online annual report and pays the prior year's franchise tax by March 1. A late or incomplete report brings a $200 penalty; unpaid tax and that penalty bear interest at 1.5% per month or part of a month (Division annual report instructions; Delaware Code, §§ 502, 504).

What goes on the corporate annual franchise tax report?

The Delaware corporation's report identifies its business, office, registered agent, directors, signing officer, and authorized stock. The online report also takes the issued shares and gross asset figures needed for the assumed par value calculation (Delaware Code, § 502(a); Division calculation guide).

The report needs the principal place of business address, which generally cannot just repeat the Delaware registered agent's address. It must name every current director and the signing officer, and state the nature of the business. An authorized officer or director signs; an incorporator may sign an initial report before directors have been elected (Delaware Code, § 502(a)).

You can file the report and pay the tax without a federal employer identification number if one has not yet been assigned.

Do Delaware LLCs and partnerships pay franchise tax too?

Delaware LLCs, limited partnerships, and general partnerships formed or registered in Delaware pay a flat annual tax of $400, due June 1 for the prior year. They do not file the corporation's annual franchise tax report, and the authorized share methods do not apply (Division LLC/LP/GP instructions).

Late payment adds $200 and 1.5% monthly interest on tax and penalty. Delaware does not prorate this annual tax. A registered series of an LLC has an additional statutory annual tax, so check its separate status (Division LLC/LP/GP instructions; Delaware Code, § 18-1107).

Does a Delaware company owe the annual tax with no income or activity?

Usually yes. No income alone does not remove the tax. A corporation generally owes franchise tax for the period it exists, with proration for a partial year. Delaware assesses an LLC or partnership's full annual tax if the entity is active in its records at any time during the year (Delaware Code, § 503(d); Division LLC/LP/GP instructions).

A narrow corporation statute allows a reduced rate for the part of a year when a corporation shows on its annual report that it did none of the business activities for which its charter was granted; the state may request an affidavit. No income by itself does not establish that condition. Check eligibility and the Division's filing procedure before relying on it.

Does a Delaware company also owe Delaware income tax?

Franchise tax and income tax are separate. A Delaware corporation that does business in Delaware may also have a Delaware corporate income tax return and tax on income allocated or apportioned to the state. A corporation incorporated there but not doing business there can still owe franchise tax while qualifying for the corporate income tax exemption for a statutory office without Delaware business activity (Delaware Division of Revenue; Delaware Code, § 1902).

An LLC's Delaware income tax treatment follows its federal tax classification; members or partners may have their own Delaware filings if the business operates there (Delaware Code, § 18-1107(a); Division of Revenue LLC guidance). For federal corporation filing, see How C corporations are taxed.

What if I ignore the bill or no longer need the company?

Ignoring Delaware franchise tax can cost the company good standing and eventually its legal status. Delaware will not issue a corporate good standing certificate with unpaid franchise tax or a missing completed report. A corporation's charter can become void after a year of unpaid tax; failure to file a complete annual report can also void it. An LLC's certificate can be canceled after three years of unpaid annual tax (Delaware Code, §§ 502(f), 510; Delaware Code, § 18-1108).

Before reducing authorized shares, calculate both methods with the proposed count. An amendment lowers the tax only if it lowers the amount due after Delaware compares the methods; weigh that against the filing cost and shares the company may still need. Reducing authorized shares requires a certificate of amendment and corporate approvals; issuing fewer shares does not change the authorized shares assessment (Delaware Code, § 242; Delaware Code, § 503). Delaware prorates franchise tax when authorized stock changes during a year (Delaware Code, § 503(e)).

To stop future Delaware franchise or annual entity-tax assessments, file a certificate of dissolution for a domestic corporation or cancellation for an LLC or partnership (Division forms). Closing the bank account or stopping business is not that filing. Before a corporation dissolves, it must file all outstanding annual reports, including a final report for the dissolution year, and pay franchise tax through the entire calendar month of dissolution. Delaware prorates corporate tax for a partial year. An LLC owes the full annual tax for the year its cancellation takes effect (Delaware Code, § 277; Delaware Code, § 503(d); Delaware Code, § 18-1107(c)). Other Delaware taxes may need separate closing filings. Gather past Delaware notices and filings before requesting tax preparation help.

Example

Illustrative US dollar figures: A Delaware corporation's charter authorizes 10,000,000 shares at $0.00001 par value. Its stock ledger shows 1,000,000 shares issued, and its year-end gross assets are $100,000.

Under the authorized shares method, the first 10,000 shares cost $250. The other 9,990,000 shares form 999 blocks of 10,000; at $85 a block, the tax is $85,165. Under the assumed par value method, $100,000 of assets divided by 1,000,000 issued shares gives $0.10 assumed par value. Multiplying that by 10,000,000 authorized shares gives $1,000,000 of assumed capital and $400 of tax. The corporation reports its issued shares and assets to use the lower method. The separate $50 annual report fee makes the filing payment $450, assuming no penalties or earlier payments.

Different for you?

• Your Delaware corporation has a foreign owner: its federal filing can include more than Form 1120; see Foreign-owned C corporation filing. If Form 5472 was missed, see Missed foreign-owner filings.
• The corporation missed several federal years: see Catching up on unfiled business returns before relying on an unreconciled asset figure.
• You run the Delaware company from California: check California minimum tax and LLC fee; Delaware payment does not settle another state's obligations.
• You are deciding whether to form an LLC or corporation: see LLC or C corporation. If you live outside the US, see Forming and running a company from abroad.
• You need to amend shares, correct a large assessment, or dissolve: bring the charter, stock ledger, balance sheet, notices, and prior reports to tax preparation before a signed report or charter filing changes the company's position.