Delaware’s Annual Franchise Tax: A Guide to Calculating and Paying for Businesses

Why Many Startups Choose Delaware for Incorporation 

Many startups are encouraged to incorporate in Delaware due to the state’s well-established corporate laws and renowned court system specializing in corporate matters. Additionally, Delaware does not levy a state income tax on corporations that are incorporated but not conducting business within its borders. However, this does not exempt such corporations from paying income tax in their home state if required, such as in California. These advantages often benefit large, publicly traded companies – a status many startups hope to achieve. For those seeking venture capital or angel funding, many investors prefer to invest in Delaware corporations. 

Understanding Delaware’s Annual Franchise Tax 

Shortly after the first year of incorporation, Delaware startups receive a notice that the Annual Franchise Tax is due. This notice can cause considerable stress as Delaware provides the franchise tax amount, which can be substantial if the corporate structure wasn’t carefully planned from the beginning. 

This article explores the Delaware Annual Franchise Tax on corporations and the various methods of calculation. 

What is the Delaware Annual Franchise Tax? 

The Delaware Annual Franchise Tax is a fee imposed on corporations incorporated in Delaware. This tax reflects the benefit corporations receive from Delaware’s legal framework, infrastructure, and business environment. Essentially, it is the cost for the privilege of being a Delaware corporation. The tax is due regardless of whether the corporation has conducted any business or generated any profit. 

The tax is due annually by March 1st, along with an Annual Report. Failing to file the report or pay the tax results in penalties, interest charges, and the corporation losing its good standing in Delaware. 

Methods of Calculating Franchise Tax 

Delaware offers two methods for calculating the annual franchise tax, and it is crucial to understand both to minimize the tax liability. Corporations can choose the method that results in the lower tax amount. The default method used by Delaware, as reflected in the tax notice, is the Authorized Shares Method, since Delaware lacks the necessary information to use the alternative method. 

Authorized Shares Method 

The Authorized Shares Method calculates the tax based on the number of shares authorized in the certificate of incorporation. The tax rates are: 

– Up to 5,000 shares: $175 (minimum annual franchise tax) 

– 5,001-10,000 shares: $250 

– Each additional 10,000 shares: $85 (maximum annual franchise tax is $200,000) 

Assumed Par Value Capital Method 

The Assumed Par Value Capital Method is an alternative that often results in a lower tax for many corporations. This method requires reporting specific information in the Annual Report, including the number of issued and outstanding shares and total gross assets as of the fiscal year end. The tax rate is $400 per million (or portion thereof) of “assumed par value capital,” calculated based on assets and issued shares. The minimum tax under this method is $400. 

Conclusion 

The Delaware Annual Franchise Tax can be a significant expense and its calculation can be complex. To avoid pitfalls, it’s advisable to understand the methods available and choose the most favorable one. For further information and example calculations, visit the Delaware Secretary of State’s website at [Delaware Franchise Tax Calculator](https://corp.delaware.gov/frtaxcalc/). If you have questions, consulting a trusted advisor can provide the most up-to-date and relevant advice for your business.