Calculating and Paying Delaware Franchise Taxes – Startups don’t need to panic
December 10, 2020
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Did you recently receive a letter from the state of Delaware stating that your startup owes thousands of dollars in franchise tax? No panic!
All Delaware companies must pay annual franchise tax to the state, even if your company is not a franchise. There are two methods of calculating franchise tax in Delaware, and Delaware uses one by default, which is more expensive than the other. However, you can probably go for the cheaper option.
Delaware franchise tax is the fee charged by the state of Delaware for the right or privilege to be incorporated as a company in the state of Delaware. Think of this as a license fee to run a business. The tax has absolutely no relevance to your company’s income – the state of Delaware requires it to keep your company in good standing.
Nowadays, franchise tax for a Delaware limited company (or LLC) or a Delaware limited partnership (or LP) is a flat rate of $ 300 per year, while franchise tax for a company is based on your type of business and the number of shares it accepts . The total cost of Delaware franchise tax includes an annual reporting fee plus actual tax. However, a nonprofit is exempt as this type of business does not pay the annual tax, although the $ 25 annual reporting fee is yet to be submitted and paid. A company with 5,000 authorized shares or less is considered a minimum stock corporation and must pay an annual reporting fee of $ 50 and taxes of approximately $ 175. Additionally, a company with 5,001 authorized shares or more is a maximum public company with a reporting fee of $ 50 and a tax range of between $ 200 and $ 200,000 per year.
There are currently two methods of calculating franchise tax in Delaware. The first is the “Authorized Stock Method” that Delaware uses to initially calculate your taxes. The calculation consists of: 5,000 shares or less: $ 175; 5,001-10,000 shares: $ 250; An additional 10,000 shares or parts thereof: add $ 85 and; The maximum annual tax is $ 200,000. Second, the “assumed par value capital method” is the most common, cheaper option of the two methods. To use this method, you must report the total gross assets of the company and the total number of shares issued. The resulting franchise tax is mostly a minimum payment of $ 400 plus the $ 50 annual reporting fee of $ 450 per year.
Gross net worth is from Appendix L of Federal Tax Form 1120 for the same year the company files its annual report. The face value used to calculate the tax is the higher of the “assumed face value” or actual face value set out in the deed of incorporation. Typically, startups can minimize taxes using the assumed par value capital method, as it calculates tax as a function of total wealth. The only downside is that even a company with few assets may owe a lot of franchise taxes if it approves a large number of shares while spending a small percentage of them. However, as long as your issued shares make up at least one-third to one-half of your authorized shares, the alternate par value capital method works.
All Delaware franchise taxes are due March 1 of each year for the previous year. A company must pay for filing an annual report with the Delaware Secretary of State. You can then file the report online and fill in the information including the address of the company, the address of the Delaware registered agent, a list of all directors, at least one officer, the number of shares issued, and finally the amount of gross assets.
If a business owes more than $ 5,000 in franchise tax, it must make quarterly tax payments by credit card. These are due at the end of the second month after each quarter, and a positive balance goes into the following year. Failure to meet the deadlines could result in a company ceasing to be associated with the state. This can complicate, delay and possibly prevent future transactions. Therefore, make sure to meet all necessary deadlines.
The content of this article is intended to provide general guidance on the subject. You should seek advice from a professional about your particular circumstances.
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