Delaware Annual Franchise Tax

Introduction

Delaware has long been a favored state for businesses to incorporate due to its business-friendly laws and well-established legal framework. However, one aspect that companies registered in Delaware need to consider is the annual franchise tax. This tax is a requirement to keep the entity active and in good standing with the state. In this article, we will explore the Delaware annual franchise tax, its calculation methods for C-corps, and the necessary information businesses need to provide for tax assessment.

What is the Delaware Annual Franchise Tax?

The Delaware Annual Franchise Tax is an obligatory tax imposed on businesses that are registered in the state of Delaware. It applies to various entity types, including C-corporations and LLCs. The tax revenue generated from the franchise tax helps support the state's budget and maintain a favorable business environment.

📅 Delaware Annual Franchise Tax is due no later than March 1 of each year.

Calculating the Franchise Tax for C-Corporations

For C-corporations, the Delaware franchise tax can be calculated using one of two methods: the Authorized Shares Method or the Assumed Par Value Capital Method. Let's take a closer look at each approach:

1. Authorized Shares Method: Under the Authorized Shares Method, the tax calculation is based on the total number of authorized shares a company is legally allowed to issue or offer. The tax rate varies depending on the number of authorized shares, with higher rates for larger corporations. It's important to note that the number of issued shares is not relevant for this method of calculation.
2. Assumed Par Value Capital Method: The Assumed Par Value Capital Method is an alternative tax calculation method. It considers the total gross assets of the corporation, as reported on the company's balance sheet. Gross assets include the value of property and fixed assets owned by the company. The tax rate is determined by applying a set rate per $1,000 of gross assets.

💡 Commenda recommends: 10M shares with a value of $0.0001 is standard for a venture backed start-up.

Choosing the Optimal Calculation Method

Since the two methods yield different tax amounts, businesses can evaluate their financial situation and choose the calculation method that results in a lower tax liability. This decision should be made before the annual franchise tax payment deadline, which is typically March 1st of the following year.

Additional Information for Tax Assessment: To accurately calculate the Delaware annual franchise tax, businesses must gather the following information:

1. Number of Authorized Shares: This refers to the maximum number of shares a company is legally allowed to issue or offer based on its corporate charter. It is important to have an accurate count of authorized shares to determine the tax liability under the Authorized Shares Method.

💡 The number of authorised shares should be 10M for a Delaware C-Corp.

2. Number of Issued Shares: The number of issued shares represents the total amount of stock that is on the market, including shares held by institutional investors and restricted shares held by insiders and company officers. The number of issued shares does not affect the calculation under the Authorized Shares Method, but it may impact other aspects of corporate governance and compliance.
3. Gross Assets: The Gross Asset Value is derived from the company's balance sheet and represents the sum of the value of property and fixed assets owned by the company. This figure is crucial for calculating the tax liability under the Assumed Par Value Capital Method.

💡 For startups and new entities, Gross Asset Value is usually $0.

Annual Franchise Tax for LLCs

Unlike C-corporations, LLCs registered in Delaware have a flat annual franchise tax of $300. This fixed fee must be paid by June 1st of the following year to maintain the entity's active status.

Conclusion

In conclusion, handling the Delaware Annual Franchise Tax and other compliance requirements can be complex for businesses. By understanding the tax calculation methods, gathering accurate information, and meeting compliance requirements, businesses can minimize their tax liability and maintain good standing in Delaware's business-friendly environment.

To streamline the process and ensure compliance on autopilot, reach out to Commenda. Commenda offers comprehensive services to assist with tax calculations, annual report filings, and other ongoing compliance tasks.