Roughly, if you’ve raised $500k to $1M in venture funding, you are likely to owe between $500 to $1,000. If you’ve raised $10M in VC funding, you are going to owe closer to $4,000. If you’ve received a bill for $75K, it is because Delaware has calculated the tax using the Authorized Shares Method. Don’t freak out; recalculate using the Assumed Par Value Capital Method. The State of Delaware requires quarterly installment payments for all companies who owe $5,000 in taxes or more. Installments are due on June 1st (40%), September 1st (20%), and December 1st (20%), with the remainder due by March 1st.
All Delaware-incorporated businesses must, however, still pay the annual franchise tax, submit an annual report, and pay a filing fee. Here’s how to figure out how much you need to pay, how to file, and what happens if you don’t. Once the company has substantial assets, the Par Value method can result in higher taxes. In that case, the simple solution is to consider authorizing a smaller number of shares. According to the latest calculator, 200,000 authorized shares will have a maximum tax of $1,865 – though the assumed par value capital method could get a lower tax amount.
What other taxes do Delaware corporations need to file/pay?
The package includes a free tax consultation with quarterly bookkeeping support and other key financial services that will help meet your business’s financial needs and filing obligations. Corporations using the assumed par value method will pay a minimum of $400 and a maximum of $200,000. Let’s learn more about what the Delaware franchise tax actually entails, how much it costs, how to calculate the cost and what can happen to a business if the tax is not paid. As discussed above, the tax on 20 million of authorized shares is $170,165 ($250.00 plus $169,915.00[$85.00 x 1999]).
So long as your issued shares constitute at least a third to a half of your authorized shares, the Alternative Par Method should work well for most startups. The default payment amount listed on your notification is set by Delaware using the Authorized Shares Method, which will almost always result in a much higher amount due for startups with limited assets. There is a helpful Franchise Tax Calculator on the Delaware website to assist in estimating your franchise taxes (note there is a different calculator for each of the 2017 and 2018 tax years).
In addition to corporations, Delaware limited liability companies (LLCs), general partnerships, limited partnerships (LPs) and limited liability partnerships (LLPs) must also pay franchise taxes. While many states have a flat franchise tax that is the same for all corporations, Delaware uses a relatively complicated system to determine its franchise taxes. The company is only required to pay the lesser of the two calculations. For a variety of reasons, Delaware is the preeminent state of incorporation in the United States. Every year around this time we get calls from a few clients in full freak-out mode, because they received a tax bill from Delaware in the five figures.
The Annual Franchise Tax is calculated based on the authorized shares method. The total tax will never be less than $175.00 or more than $200,000.00. Annual reports for corporations are sent to the registered agents in December of each year. Annual reports or reprints may be requested through your registered agent.
What Method Should I Use?
In addition to paying the franchise tax, businesses incorporated in Delaware must also file an annual report and pay a small filing fee. Because a company’s tax is based on the number of shares authorized, the quickest and easiest way to lower your future liability is to amend the Certificate of Incorporation to decrease the number of authorized shares. Companies are often formed with a huge number of shares, when, in reality, they don’t need such a large number.
You’ll need to know your corporation’s gross assets and authorized shares. For every additional 10,000 shares authorized after that, you pay another $85 in franchise tax, up to a maximum of $200,000. Keep in mind, this number could be different from the number of shares your company has actually issued. Your authorized share number is the maximum number of shares your corporation could sell based on your corporate bylaws or charter. Under this method, your franchise tax is based on how many shares your corporation has authorized.
It is mandatory for Delaware Corporations to file their annual franchise taxes online. This method calculates the tax based on your corporation’s total gross assets and the ratio of issued shares to authorized shares. Your corporation will owe an estimated $400 for each $1,000,000 in gross assets. The minimum tax when using this method is $400, and the maximum tax is $200,000. The Delaware Division of Corporations provides two methods to calculate Delaware franchise tax. The first method is based on the authorized share count, and VC-backed startups with option pools can quickly get to thousands of dollars in taxes due.
- The Delaware Division of Corporations provides two methods to calculate Delaware franchise tax.
- Delaware franchise taxes may be calculated in one of the two ways outlined below.
- To use this method, you must give figures for all issued shares(including treasury shares) and total gross assets in the spaces provided in your Annual Franchise Tax Report.
- We often get the question, “why should my startup consider incorporating out-of-state and become a Delaware C-corp?
- Regardless of which method you choose, the tax due will never be less than $175 or more than $200,000.
If the need arises, a Stock Amendment can be filed with the state for approval to increase the number of authorized shares of the Corporation. Startups can usually minimize franchise taxes by using the Assumed Par Value method, since it calculates tax as a function of total assets. The only pitfall to watch out for is that even a company with few assets could potentially owe very large franchise taxes if it authorizes a very large number of shares but then issues a tiny percentage of them.
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Over a dozen states, including Alabama, California, Georgia, New York and Texas, have a franchise tax. This specific tax is implemented on companies for the privilege of doing business in the state. No par value stock is assigned a value of $100 per share for purposes of the above calculation. Thus, it is generally advisable to avoid no par value stock and to assign a very low par value to shares if possible.
This tax is imposed on all Delaware-based businesses that want to maintain their good standing in the state — whether they are dormant or active. A corporation with 20,000,000 shares authorized pays $170,165 ($250.00 plus $169,915[$85 x 1999]). A corporation with 1,000,000 shares authorized pays $8,665 ($250 plus $8,415[$85 x 99]). A corporation with 20,000 shares authorized pays $335 ($250 plus $85). You’ll incur a $200 penalty if you don’t file an annual report on or before March 1.
If the tax is not paid by this date, Delaware imposes a $200 penalty, as well as a 1.5 percent interest fee each month. If you incorporated in Delaware, yes, you need to file and pay the Delaware Franchise Tax. Startups are required to file even if you had no financial activity during the year. Thankfully, it’ll get much easier from here due to the flat fee tax obligations that Limited Liability Companies and other business entities pay as part of their annual tax obligations.
While this may seem like a fine idea at the time, it leads to major tax consequences later. In Delaware, less stock and a smaller par value will result in a far smaller tax bill each year (a Delaware LLC, by contrast, will pay a flat tax each year that does not fluctuate). Corporations using the authorized shares method will pay a minimum of $175 and a maximum of $200,000.
Calculating the Delaware Franchise Tax:
The minimum tax for companies using the Assumed Par Value Capital Method is $400. With either method the maximum tax is $200,000, unless the company has been identified as a “large corporate filer,” in which case their tax will be $250,000.00. To assist Delaware corporations, the state created a franchise tax calculator and a helpful What is a General Ledger GL page on how to calculate taxes. For your convenience, we’ve compiled information from the Delaware website below. This tax is often calculated to the minimum payment of $350 for the Franchise tax and another $50 for the annual report fee. The state of Delaware uses this method to calculate the company’s taxes initially.
How Are Franchise Taxes Calculated in Delaware?
And the maximum franchise tax for all corporations using either method is $200,000. Corporations with 1,500 shares or less and NO par value will always have a maximum tax of $175. It is a requirement that all Delaware corporations file an annual report. The default method by which the Delaware Secretary of State’s office calculates franchise tax on domestic profit corporations is called the “authorized shares” method – and it is just what it sounds like. If the corporation’s shares have a par value, the tax is calculated based on the number of shares authorized.
Who has to pay the franchise tax?
Foreign Corporations, Nonprofits, Limited Liability Companies, General Partnerships, Limited Partnerships and Limited Liability Partnerships pay a flat-rate annual fee or tax. There are two methods that corporations can figure their annual franchise tax. The default method for the State of Delaware is the Authorized Share Method. This option is fairly simple; 5000 shares or less you pay the minimum $175. If your DE Corporation has high value assets, the Assumed Par Value Capital Method is more complicated, but sets a cheaper tax fee.
The California franchise tax, for example, is equal to the larger of your California net income multiplied by the 8.84 percent tax rate or the $800 minimum tax. The minimum tax is due the first quarter of each accounting period and must be paid whether your startup is active, inactive, operates at a loss or files a return for a short period of less than 12 months. The minimum tax is waived on newly formed or qualified corporations filing an initial return for their first taxable year. However, any first-year net income is still subject to the 8.84 percent tax rate.
We hope this overview of the two calculation methods will help ease your stress and simplify your tax season. This method calculates how much tax is due with a more complicated function based on how many shares are authorized, how many shares are issued, and the amount of a company’s gross assets. For corporations using the Authorized Shares Method, the minimum franchise tax is $175 and the maximum franchise tax is $200,000.
Delaware lets you use whichever method amounts to the least tax owed. We often get the question, “why should my startup consider incorporating out-of-state and become a Delaware C-corp? Here are a few reasons why you would want to initially incorporate in Delaware. If you incorporated in Delaware, you need to pay a Delaware Franchise Tax. The calculator below will help you estimate how much you’ll need to pay. The deadline is typically the last day of February – scroll down to access links to visit the Delaware Division of Corporations webpage where you can pay.