How To Calculate Delaware Franchise Tax

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When considering the best state for incorporating your business, Delaware often tops the list. Known for its business-friendly legal framework, Delaware attracts thousands of companies each year, from small startups to Fortune 500 giants. In all of this, an important part of incorporating in Delaware is the Delaware Franchise Tax.  

In this article, we’ll break down the essentials of the Delaware Franchise Tax, including how it’s calculated, who needs to pay it, and key deadlines to keep in mind.

What is a Franchise Tax?

A franchise tax is a state-level tax imposed on certain businesses for the privilege of conducting business within that state. It’s a fee paid to the state government for the right to operate as a legal entity within its borders.

Franchise taxes are assessed by states on businesses for the right to operate within their borders. Unlike income taxes, which are based on profits, franchise taxes are calculated using factors like net worth, authorized or issued shares, sales, or a flat fee. These taxes vary significantly across states, with some states exempting certain businesses or having no franchise tax at all. Franchise taxes are separate from both federal and state income taxes, requiring businesses to file separate returns.

The franchise tax is a state-level tax imposed on businesses for the privilege of conducting business within that state. It is based on factors like net worth, authorized or issued shares, sales, or a flat fee. It is not based on income and is separate from both federal and state income taxes.

C-corps tax, also known as the corporate income tax, is a federal tax imposed on the net income of C corporations. It is based on the company’s profits and is separate from the franchise tax. C corporations must pay taxes on their profits at the corporate level, and shareholders must also pay taxes on dividends received from the corporation, which is known as double taxation.

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source: TaxFoundation

Delaware Franchise Tax

While the name might imply it’s a tax on franchised businesses, the reality is far more nuanced. The Delaware Franchise Tax is an annual franchise tax that Delaware requires all domestic corporations, whether stock or non-stock and for-profit, to pay.

It’s calculated based on the number of authorized shares of stock a company has, with a minimum tax of $175 per year. The tax rate increases as the number of authorized shares increases, with a maximum tax of $200,000 per year.

Speaking of nuance, Delaware’s tax structure varies depending on the corporation type and the calculation method chosen, following these guardrails:

  • Stock Corporations: These can calculate their tax using either the Authorized Shares Method or the Assumed Par Value Capital Method.
    • The minimum tax is $175 for the Authorized Shares Method and $400 for the Assumed Par Value Capital Method.
    • The maximum annual tax is capped at $200,000, regardless of the method used.
  • Non-Stock Corporations: For-profit entities not meeting the criteria for exemption are required to pay a flat annual franchise tax of $175.

For corporations with liabilities of $5,000 or more, Delaware mandates installment payments throughout the year:

  • 40% due on June 1st,
  • 20% due on both September 1st and December 1st,
  • The remainder due by March 1st of the following year.

How to Calculate Delaware Franchise Tax

Calculating the Delaware Franchise Tax can be done using two methods: 

  • Authorized Shares Method or the 
  • Assumed Par Value Capital Method. 

Below, we’ll explain how both methods work and how to calculate with examples:

1. Authorized Shares Method

This method calculates your Delaware Franchise Tax based on the number of shares your corporation is authorized to issue. It’s straightforward but can lead to steep tax bills for companies with a large number of authorized shares, especially those in high-growth industries. Here are the terms:

  • Up to 5,000 shares: Minimum tax of $175.
  • 5,001–10,000 shares: $250.
  • Each additional 10,000 shares (or portion thereof): Add $85.
  • Maximum annual tax: $200,000.

To better understand this method, let’s use an example:

Let’s say your corporation has 2,500,000 shares authorized. Here’s how the tax is calculated:

  1. First 10,000 shares: $250
  2. Next 2,490,000 shares (2,500,000 – 10,000):
    • Each additional 10,000 shares incurs $85
    • 2,490,000/10,000 = 249 increments of $85
    • Tax for these shares: 249 × $85 = $21,165
  3. Total Tax: $250 (first 10,000 shares) + $21,165 (remaining shares) = $21,415

Note: For corporations with a large number of authorized shares, this method can lead to significant costs. It’s worth comparing this with the Assumed Par Value Capital Method to determine the lower tax liability and save your business money.

2. Assumed Par Value Capital Method  

This method involves more detailed calculations than the Authorized Shares Method, relying on figures like total gross assets, issued shares, and the par value of authorized shares. It is particularly useful for startups and businesses with high authorized shares but relatively low gross assets. The tax is based on $400 per million dollars of assumed par value capital, with a minimum tax of $400.

Here’s an example illustrating how it is calculated:

Let’s take for example, a corporation having 2,000,000 shares of stock with a par value of $1.00 and 500,000 shares of stock with a par value of $10.00, gross assets of $1,000,000.00 and issued shares totaling 500,000.

Step-by-Step Calculation

1. Calculate the Assumed Par Value
Divide the total gross assets by the total issued shares (including treasury shares) to six decimal places:

  • $1,000,000 ÷ 500,000 = $2.0 (assumed par).

2. Value of Shares Below the Assumed Par
Multiply the assumed par by the number of authorized shares with a par value below the assumed par:

  • $2.0 x 2,000,000 = $4,000,000.

3. Value of Shares Above the Assumed Par
Multiply the authorized shares with a par value above the assumed par by their respective par value:

  • 500,000 shares x $10.00 = $5,000,000.

4. Calculate the Assumed Par Value Capital
Add the results of Step 2 and Step 3:

  • $4,000,000 + $5,000,000 = $9,000,000 (assumed par value capital).

5. Determine the Franchise Tax
Round the assumed par value capital up to the next million (if it exceeds $1,000,000), then divide by 1,000,000 and multiply by $400:

  • $9,000,000 rounds up to $9,000,000.
  • $9,000,000 ÷ $1,000,000 = 9.
  • 9 x $400 = $3,600 franchise tax.

Key Considerations

  • Always calculate taxes using both methods and pay the lower amount.  
  • Taxes range between $175 (minimum) and $200,000 (maximum).  
  • If your tax liability exceeds $5000, estimated payments are due throughout the year.  

Note: If you change your company’s stock or its value during the year, Delaware calculates your Franchise Tax for each period that a specific setup was in place. The tax is prorated by multiplying the tax for each setup by the number of days it was active, divided by the total days in the year (365 or 366 for leap years). Finally, all prorated amounts are added together to determine your total tax for the year, ensuring you only pay for the time each setup was in effect.

Disclaimer: The information on this page is provided as general guidance for startups and is not a substitute for professional advice.

Delaware Franchise Tax Calculator

FAQs

What If I Have Multiple Businesses?

If you have multiple LLCs or LPs, you can conveniently pay their Delaware Franchise Tax together by entering your information online. Once the payment is processed, you’ll receive a confirmation email. However, for corporations, you’ll need to pay taxes on a separate page and handle each business entity individually, even if you own multiple corporations.

What Should I Do After Paying My Delaware Franchise Tax?

After paying your Delaware Franchise Tax, you may need a Certificate of Good Standing, a document from the Delaware Secretary of State that certifies your company’s incorporation date, that it is current on taxes, and in good standing with the state. 

This certificate is often required for tasks like opening a corporate bank account, securing loans, buying or selling property, registering to operate in another state, or merging with another company. It serves as proof of your business’s validity and is typically accepted for 30–60 days from its issue date, after which a new certificate may be needed.

What Happens if the Delaware Franchise Tax Is Not Paid on Time?

Missing the tax deadline (March 1st for corporations, June 1st for LLCs) incurs a $200 late fee and monthly interest, which can quickly add up over time. Failing to pay the Delaware Franchise Tax or maintain an active registered agent can have more serious consequences, however. 

These include your company being invalidated or cancelled by the Delaware Division of Corporations. Missed payments will also be recorded, potentially deterring investors. For corporations, failing to pay for two consecutive years (three for LLCs/LPs) can also result in the company being voided or cancelled. 

Do I Need to Pay Delaware Franchise Taxes if My Company is Not Active?

Yes, even if your Delaware company is not active or conducting business, you must still pay the Delaware Franchise Tax to remain in Good Standing. If your company is no longer operating, you should follow the proper steps to dissolve a corporation or cancel an LLC to avoid ongoing tax obligations.

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About the author: Joy Samuel

Joy Samuel is a renowned content writer currently contributing to Startup Geek. With a rich background in editorial writing and a unique ability to blend business methodology with customer-focused content, he helps startups flourish by building enduring relationships with their audiences. His area of focus encompasses product reviews, copywriting, tech features, and the analysis of marketing case studies. He showcases a deep interest in productivity and inbound marketing strategies. Joy has collaborated with prominent brands including ScreenRant, Craft Your Content, Marker.io, Rigorous Themes, and iTechTalk. His passion lies in creating valuable experiences that drive growth and support individuals in achieving their goals.

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