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If you're planning to start or already operate a company in Delaware, you've likely come across the term franchise tax. All business owners should be aware of the Annual Franchise Tax as all companies incorporated in Delaware are subject to an annual franchise tax.
What is a franchise tax? Is it similar to corporate income tax? How to submit it? Where to submit it? This article will answer all these questions and provide you the information that you need to understand Delaware’s Annual Franchise Tax.
Many entrepreneurs who come across franchise tax for the first time may think it is a tax imposed on franchises. However, that is not the case. Annual Franchise tax is a fee imposed on limited liability companies (LLCs) and corporations for the privilege of doing business in Delaware.
Sole traders are not subject to a franchise tax because they are not formally registered in Delaware. It is important to note that a franchise tax is different from a federal or state tax.
The tax is paid annually and varies by state and the structure of your company. Some states may require only C corporations to file for annual franchise tax. The state determines your company’s franchise tax depending on the:
These entities include:
Franchise taxes and Annual Reports are due March 1st of each year for corporations incorporated in Delaware. Corporations must file an Annual Franchise Tax Report and pay Franchise Tax for the privilege of incorporating in Delaware regardless of where they conduct the business.
While Delaware LLCs, LPs & LLPs need to pay US$300/year on or before June 1st of each year, regardless of income. Delaware Corporations pay a minimum of US$225/year if the corporation has less than 5,000 Authorized Shares. If the corporation has more than 5,001 Authorised Shares, it needs to pay a minimum of US$400/year or a maximum of US$200,000.
Penalties
You may face penalties if you fail to pay the annual franchise tax or pay it late. Late payment may result in a US$200 late fee plus 1.5% interest per month on the outstanding amount
Unpaid Delaware franchise tax will remain or record
If you miss paying franchise tax in Delaware for your LLC or corporation, the report will always be on record with the Delaware Division of Corporations. Even after you pay the franchise tax, the missed report will still stay on record.
If anyone researches your company, they will find out that you missed being compliant in a particular year, which may lead to missed funding or potential investors.
Cancellation of your Delaware LLC
If you fail to pay Delaware franchise tax for your LLC/LLP/LP for three consecutive years, it may lead to the cancellation of your LLC/LLP/LP by the State of Delaware.
Your Delaware corporation may also be dissolved for failure to pay the annual franchise tax for two consecutive years.
Companies in Delaware can pay franchise tax directly online on the Delaware Division of Corporation website or use a Registered Agent. Many registered agents, such as Icon Office, offer filing services and make sure your filings are accurate, complete, and timely. We help companies that use our registered agent services to maintain the company’s good standing within Delaware.
We also help entrepreneurs form an LLC company and handle all mail. With our services, you get to benefit from our Registered Agent services freely for the first 12 months. You will also benefit from free filing of your Registered Agent and unlimited scanning of mail addressed to your business.
For more information on franchise tax, contact us at [email protected].
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