Most startup companies are typically formed with a small number of authorized shares and a low (or zero) par value. Each additional 10,000 shares add $85 with the maximum annual tax due of $200,000. For every additional 10,000 shares authorized after that, you pay another $85 in franchise tax, up to a maximum of $200,000. If you’re trying to figure out if you owe Delaware franchise tax, Bench can help. Our all-star team does your monthly bookkeeping for you and sends your financials to trusted tax professionals for a stress free filing experience.
- My clients are individual entrepreneurs, early stage, venture-backed and public companies and venture capital investors.
- Most VC backed startups are Delaware C-Corps, which means that most VC-backed startups DO need to file.
- Thus, it is generally advisable to avoid no par value stock and to assign a very low par value to shares if possible.
Total gross assets shall be those “total assets” reported on the US Form 1120, Schedule L (Federal Return) relative to the corporation’s fiscal year ending the calendar year of the report. The tax rate under this method is $350 (to be increased to $400 effective for the 2018 tax year) per million or portion of a million. The minimum tax due for this method is $400 and the maximum is $200,000. Unless the Corporation has been identified as a Large Corporate Filer, the maximum tax is $250,000. The Delaware Division of Corporations provides two methods to calculate Delaware franchise tax.
Q: What information is required on the annual report?
Note that only one Delaware annual report is required to be filed by March 1st, even for corporations paying quarterly franchise taxes. The Delaware Secretary of State charges an additional filing fee of $50 for a Delaware corporation annual report. The minimum franchise tax is $175.00 for corporations using the Authorized Shares Method and $400.00 for corporations using the Assumed Par Value Capital Method.
- Delaware provides a Microsoft Excel worksheet that can be used to show the tax based on various assumptions.
- The par value of the preferred shares being transacted is usually specified here, along with other particulars like the issue price, number of shares, and payment terms.
- If the federal income tax return is on extension, other financial data will need to be used for total gross assets.
- If your assumed par value capital from Step 2 is lower than $1,000,000, your annual franchise tax is restricted to $400.
- If the stock has no par value, then “no par value” is stated on the certificate instead.
- The Delaware franchise tax is collected every year by the Delaware Department of State.
A franchise tax, sometimes called a privilege tax, is a fee you pay for the privilege of doing business in a certain state. For these reasons, more than a million businesses are incorporated in Delaware, including more than half of all publicly traded and Fortune 500 companies. If you incorporated in Delaware, yes, you need to file and pay the Delaware Franchise Tax. Most VC backed startups are Delaware C-Corps, which means that most VC-backed startups DO need to file.
What date should I use to value the Gross Assets?
In some states, there is a designated state agency or department that collects franchise taxes, and it may be separate from the entity in charge of collecting income taxes. Common business entities that may be subject to franchise taxes include corporations and limited liability companies (LLCs). Franchise taxes can also apply to sole proprietorships and partnerships, depending on the state.
Calculating the Delaware Franchise Tax:
Any changes to these details typically require an amendment to the Certificate of Incorporation. The Assumed Par Value Capital Method in the above example results in a much lower tax ($26,800 vs. $170,165). Delaware would automatically show the higher tax due on their website using the authorized shares method. It is up to the taxpayer to select the Assumed Par Value Capital Method if it results in a lower tax. Technology and life sciences companies that choose to incorporate in Delaware must pay an annual franchise tax.
Methods of Calculating the Tax
If you’re not working with an accounting firm, you’ll need to total up your asset base and enter that number. Then you need to hit the “recalculate” button and wait while the system generates a new balance. The new number will very likely be how are direct costs and variable costs different lower than the original number you saw. If your DE franchise tax seems too high, use our calculator to see if your CPA used the wrong calculation method, and read our info on how the calculation method can dramatically increase the tax bill.
The authorized share method in Delaware
For these reasons, it is important to be aware of your franchise tax obligations in every state where you do business and make sure that you make all franchise tax payments on time. In most cases, businesses are required to file separate franchise tax returns in each state where they do business. The due date for filing a franchise tax return depends on the state and may vary from year to year. Generally, it’s best to check with your state’s department of revenue, franchise tax board, or other tax authority to determine when your franchise tax return is due.
Who has to pay the franchise tax?
However, in addition to incorporation, a corporation must actually be “doing business” in Delaware to be subject to the state income tax. The par value of a common share is an arbitrary value assigned to shares to fulfill state requirements. The par value is unrelated to the price at which the shares are first issued or their market price once they begin trading.
If the Company has dissolved it must be properly dissolved with Delaware, otherwise the Company will continue to be liable for the Annual Franchise Tax. Corporations owing more than $5,000 should make estimated payments with 40% due June 1st, 20% due September 1st, 20% due by December 1st, and the remaining due March 1st. At any moment, executives or team members may own public or private stock in any of the third party companies we mention. Help us have a productive first consultation by providing some additional information. Also at Kruze, another option is working with a PEO; that is how you “Incorporate in a state.” Hope that helps, thanks.
Unlike income taxes, which are based on a business’s profits or earnings, franchise taxes can be based solely on a business’s presence in the state. In other words, if a business is licensed to operate in the state, it may have to pay a franchise tax for the privilege of doing business in the state, regardless of whether it is profitable. Here is a helpful “Franchise Tax Calculator” spreadsheet provided by Delaware to assist in estimating your franchise taxes. Note, in addition to the franchise tax, there is also a $50 filing fee for the annual report. Let’s imagine a Delaware-incorporated company reported total gross assets of $1,000,000 on their federal taxes this year.