Heard about a fee paid for being able to do business in a state? Maybe, yes. But ever heard about a fee paid for incorporating in a state regardless of doing business? In Delaware, people have heard about that too.
And do not get confused about the word, “Franchise”. It doesn’t refer to the franchise businesses but all the businesses incorporated in Delaware state are liable to file an Annual Report as well as pay the Franchise tax.
In this article, we will be answering common questions about this tax along with providing details about it.
What is the Delaware Franchise Tax?
Delaware Franchise tax is a fee for being able to own a Delaware company and it is imposed by the State Government. Every business has to pay it regardless of their business income, model, or company structure. It can be considered as a goodwill fee submitted to the state.
When is the due date for filing the tax?
Depending on the company type, the deadline of submitting the annual report and filing this tax can differ.
For corporations, the last date of filing the tax is March 01, every year, failing to which there is a penalty. Corporations need to pay US $200 as the penalty with a monthly interest rate of 1.5% on it.
For LLCs and LPs, the deadline is June 01, every year. The penalty of filing the tax late is the same as for corporations.
Remember that the tax needs to be paid even if there has been no business or loss in the calendar year. So, if the corporation has been shut down, it is important to revoke the Delaware business.
What information is required on the annual report?
You annual report of Delaware corporation requires the following information:
- Legal name of entity
- Total no. of authorized shares
- Class and par value of those shares
- Franchise tax and fees due breakdown
- Principal business address
- Business contact number
- Names and addresses of all the directors
- Name and address of at least one officer
Not just this, but it must be signed by an authorized signer. It could be the president of the corporation or any of the directors. It could also be the secretary or other duly authorized officers.
If it is one of the initial reports, then the incorporator can also become the authorized signer even if the board of directors is still under the election process. However, it is not allowed for subsequent annual reports.
How is it calculated?
The Delaware state uses two methods: Authorized Shares Method and Assumed Par Value Capital Method. A corporation has to pay less of the two methods.
Authorized Shares Method
It is used to calculate your taxes by considering the authorized shares. The taxes are as follows:
- For less than or equals to 5,000 shares, it is US $175
- From 5,001 to 10,000 shares, it is US $250
- For every 10,000 shares and a portion thereof, US $85 keeps getting added in US $250
The maximum limit in this method is US $200,000.
Assumed Par Value Capital Method
It is a complex method to calculate tax as it includes total gross assets listed on your Schedule L. However, the minimum tax in this method is US $400. The maximum remains the same as the Authorized Shares Method.
Remember, in any case, you must add US $50 as the annual report fee along with the calculated tax.
The tax can be paid with the help of your service provider or can directly do it to the Delaware state.
Also, the non-stock or non-profit corporations are exempt and do not pay the standard Delaware Franchise Tax but they still need to submit the report and file taxes with the annual report fee of US $25.
For all the non-exempt, non-stock corporations, the tax is US $175 with no alternative method.
For large corporate filers, the maximum limit of Delaware Franchise tax is US $250,000.
What qualifies me as a “large corporate filer”?
Under Title 8 Section 503, the Delaware state has put the code for the large corporate filers. Corporations having consolidated gross income or consolidated gross assets of US $750 million or more come under the large corporate filers.
What is the quarterly installment scheme?
The state of Delaware allows a quarterly payment scheme for the taxpayers owing more than US $5,000. In this scheme one has to pay 40% of the estimated taxes by June 01, 20% by September 01, 20% by December 01, and the rest by March 01.
However, the quarterly scheme doesn’t mean four reports. Only one annual report needs to be submitted by March 01.
I have paid the annual registered member payment, do I still need to pay the franchise tax?
Yes, both the fees are unrelated and must be paid. The Franchise Tax is paid to the state of Delaware simply for having the privilege of doing business. As for the Annual Registered Agent fee, it is paid to Harvard Business Services Inc. for acting as the agent of your entity.
Is there any other requirement or things that need to be submitted along with it?
Only the annual report needs to be submitted along with the Delaware Franchise Tax. However, the information of assets need to be submitted as well in case of the Assumed Par Value Capital Method.
What if the business shuts down or merges with another before the end of tax year?
In case of shutting down and mergers, the taxes need to be cleared at the time of it being done. A certificate of dissolution or merger needs to be filed to the state of Delaware as well. Also, the annual report needs to be filed up to the date of merger or dissolution.
For more queries and concerns, you can directly get in touch with our experts. Also, if you are looking for information related to Form 1099, check out Types of Form 1099 to see if you are eligible to issue one.
Written by – Priyanka Rampal
Follow us for more good reads and helpful insights if you have queries related to finance management and tax filing!