How to Handle DE Franchise Tax Filing Requirements and Deadlines

Delaware is a popular choice for businesses due to its corporate-friendly laws, but companies incorporated there must comply with annual franchise tax requirements. This tax applies even if the business does not operate in Delaware, making it essential for corporations to understand their obligations.

Failing to meet these requirements can lead to penalties and legal complications. Understanding how to calculate liability, meet deadlines, and maintain proper records helps avoid unnecessary costs.

Filing Requirements

All corporations incorporated in Delaware must file an annual franchise tax report with the Delaware Division of Corporations, regardless of whether they conduct business in the state. The report includes the corporation’s legal name, principal business address, names and addresses of officers and directors, and the total number of authorized shares.

The filing process is completed online through the Delaware Division of Corporations’ website. Corporations log in using their unique business entity file number, assigned at incorporation. The system calculates the franchise tax based on the reported share structure. Payment can be made electronically via credit card or ACH transfer.

Foreign corporations registered to do business in Delaware do not pay a franchise tax but must file an annual report and pay a $125 fee. Failure to file can result in the loss of good standing status, affecting the company’s ability to secure financing, enter contracts, or conduct business.

Ways to Calculate Liability

Delaware corporations can calculate their franchise tax using either the Authorized Shares Method or the Assumed Par Value Capital Method. Companies can choose the method that results in the lower tax liability.

Authorized Shares

This method calculates tax based on the total number of authorized shares, regardless of how many are issued or outstanding. The tax follows a tiered system:

– 5,000 or fewer authorized shares: $175
– 5,001 to 10,000 shares: $250
– More than 10,000 shares: $250 plus $85 for each additional 10,000 shares or portion thereof, up to a maximum of $200,000

For example, a corporation with 50,000 authorized shares would owe:

– First 10,000 shares: $250
– Remaining 40,000 shares: (40,000 ÷ 10,000) × $85 = $340
– Total franchise tax: $250 + $340 = $590

This method is often more expensive for companies with a high number of authorized shares, even if only a small portion is issued.

Assumed Par Value

This method calculates tax based on issued shares and total gross assets, using the formula:

(Total issued shares ÷ Total gross assets) × Total authorized shares × $400 per $1 million of assumed par value

The minimum tax under this method is $400.

For example, a corporation with:

– 1,000,000 authorized shares
– 500,000 issued shares
– $5,000,000 in total gross assets

Would calculate its assumed par value as:

(500,000 ÷ $5,000,000) × 1,000,000 = $100,000

Since the tax rate is $400 per $1 million of assumed par value, the tax owed is:

($100,000 ÷ $1,000,000) × $400 = $40 (minimum tax of $400 applies)

This method benefits companies with many authorized shares but relatively low issued shares and assets.

Alternative Methods

Certain corporations qualify for alternative tax structures. Non-stock corporations pay a flat $25 franchise tax. Public benefit corporations follow the same tax calculations as traditional corporations but must also file an annual report detailing their public benefit activities.

Corporations that believe their tax liability is miscalculated can request a review from the Delaware Division of Corporations. This is particularly relevant for companies undergoing restructuring, mergers, or significant changes in share structure. Consulting a tax professional can help businesses determine the most cost-effective method.

Payment Deadlines

For most domestic corporations, franchise tax and the annual report are due by March 1 each year.

Corporations owing $5,000 or more in franchise tax must make estimated quarterly payments:

– 40% of the prior year’s tax by June 1
– 20% by September 1
– 20% by December 1
– The remaining balance by March 1 of the following year

Payments can be made electronically through the Delaware Division of Corporations’ online portal using credit cards, debit cards, or ACH transfers. Checks or money orders must be postmarked by the due date to be considered timely.

Penalties for Non-Compliance

Missing the March 1 deadline results in a $200 late fee, plus interest of 1.5% per month (18% annually) on the unpaid balance.

Delaware considers delinquent entities “void,” meaning they lose the ability to conduct business, enter contracts, or initiate lawsuits in state courts. Banks and investors often require proof of good standing, so non-compliance can disrupt financing and operations.

Prolonged failure to pay can lead to administrative dissolution by the Delaware Secretary of State. Reinstating a dissolved company requires paying all outstanding taxes, penalties, and interest, along with additional reinstatement fees.

Maintaining Records

Corporations must maintain accurate records to ensure compliance. At a minimum, businesses should retain copies of annual franchise tax reports, payment confirmations, and correspondence with state authorities.

For companies using the Assumed Par Value Capital Method, keeping federal tax returns and asset valuation records is essential, as these figures impact tax calculations. Delaware does not specify a retention period, but best practices suggest keeping records for at least seven years to align with corporate governance and IRS audit guidelines.