What is Delaware Franchise Tax?
Delaware Franchise Tax is an annual fee imposed by the State of Delaware on all corporations incorporated within the state. This tax grants corporations the legal privilege of maintaining their corporate status and operating as a Delaware entity.
Despite its name, the "Franchise Tax" has nothing to do with franchise businesses. Every Delaware corporation, regardless of business type, structure, or operational status, must pay this tax to maintain good standing with the state.
The franchise tax is not based on your company's income, profits, or business activities. Instead, it's calculated using either the number of authorized shares or the company's assumed par value capital, whichever results in a lower tax obligation.
Delaware Annual Report Requirements
Along with the franchise tax payment, Delaware requires all corporations to file an Annual Report containing specific company information necessary for tax calculation and state records.
Required Information includes:
Company's registered office address and registered agent information
Names and addresses of all directors and officers
Business address and nature of business activities
Authorized shares, issued shares, and par value details
Total gross assets of the corporation
Any changes in corporate structure or ownership during the year
Who Must File and Pay?
All Delaware corporations must file an Annual Report and pay franchise tax, including:
Active corporations conducting business operations
Inactive or dormant corporations with no business activity
Holding companies that own assets or other entities
Corporations in the process of dissolution (until formally dissolved)
Exempt domestic corporations are not required to pay the franchise tax but must still file the Annual Report to maintain their tax-exempt status and good standing.
Delaware Franchise Tax Calculation Methods
Delaware offers two calculation methods, and corporations can choose the method that results in the lowest tax obligation.
Method 1: Authorized Share Method (Default Method)
This method bases the tax calculation solely on the number of authorized shares in your corporation's certificate of incorporation.
Tax Calculation Structure:
1 to 5,000 authorized shares: Minimum tax of $175
5,001 to 10,000 authorized shares: $260 ($175 base + $75 additional)
Each additional 10,000 shares (or portion thereof): Add $75 to the total
Maximum franchise tax cap: $200,000 annually
Share Classifications:
Minimum Stock Corporation: 5,000 or fewer authorized shares
Annual Report fee: $50
Franchise tax: $175
Total annual cost: $225
Maximum Stock Corporation: 5,001 or more authorized shares
Annual Report fee: $50
Franchise tax: $200 to $200,000 (depending on authorized shares)
Total annual cost: $250 to $200,050
Key Definitions:
Authorized Shares: The maximum number of shares legally permitted to be issued as specified in the certificate of incorporation
Issued Shares: The actual number of shares distributed to shareholders (cannot exceed authorized shares)
Method 2: Assumed Par Value Capital Method
This method considers the company's financial position by factoring in total assets, issued shares, and authorized shares to determine the tax obligation.
Calculation Process:
Step 1: Calculate Assumed Par Value
Divide Total Gross Assets by Total Issued Shares
Formula: Assumed Par Value = Total Gross Assets ÷ Total Issued Shares
Step 2: Calculate Assumed Par Value Capital
Multiply Assumed Par Value by Total Authorized Shares
Formula: Assumed Par Value Capital = Assumed Par Value × Total Authorized Shares
Step 3: Determine Annual Franchise Tax
Tax rate: $400 per $1,000,000 of assumed par value capital
Round up to the next million if the capital exceeds $1,000,000
Minimum tax: $400 (even if calculation results in lower amount)
Understanding Par Value: Par value is the nominal value assigned to each share of stock as designated in the certificate of incorporation. Delaware law allows par values as low as $0.000001 per share, providing flexibility in corporate structuring.
Filing Deadlines and Requirements
Annual Deadline
March 1st is the annual deadline for filing the Annual Report and paying the Delaware Franchise Tax. If March 1st falls on a weekend, the deadline extends to the next business day.
Filing Process
Prepare Required Information: Gather all necessary corporate and financial data
Calculate Tax Obligation: Use both methods and select the lower amount
Complete Annual Report: Fill out all required sections accurately
Submit Payment: Pay the franchise tax along with the $50 annual report fee
File with Delaware Division of Corporations: Submit electronically or by mail
Penalties and Consequences for Non-Compliance
Late Filing Penalties
$200 penalty for failing to file by the March 1st deadline
1.5% monthly interest on unpaid franchise tax amounts
Interest compounds monthly until full payment is received
Certificate of Good Standing Issues
The Delaware Secretary of State will not issue a Certificate of Good Standing for corporations with:
Outstanding franchise tax obligations
Incomplete or unfiled Annual Reports
Unresolved penalties or interest charges
Corporate Inactive Status
Corporations that fail to file their Annual Report and pay franchise tax for more than one year risk having their corporate status marked as "inactive" by the state.
Consequences of Inactive Status:
Loss of good standing with the state
Potential difficulties with banking and business operations
Complications with contracts and legal agreements
Required revival process with additional fees
Corporate Revival Process
If your corporation becomes inactive, you must:
Pay all outstanding franchise taxes, penalties, and interest
File all missing Annual Reports
Submit a formal revival application to the Delaware Division of Corporations
Pay additional revival fees (typically $200-$500 depending on how long inactive)
Wait for state approval and restoration of good standing
Benefits of Maintaining Good Standing
Legal Protection
Continued limited liability protection for shareholders
Ability to conduct business legally in Delaware and other states
Protection of corporate name and identity
Business Operations
Ability to open and maintain business bank accounts
Qualification to obtain business licenses and permits
Authority to enter into contracts and agreements
Eligibility for business loans and financing
Administrative Benefits
Access to Certificates of Good Standing for business purposes
Ability to register to do business in other states
Maintenance of corporate credit history and standing
Best Practices for Delaware Franchise Tax Compliance
Annual Planning
Set calendar reminders for the March 1st deadline well in advance
Review both calculation methods annually to minimize tax obligation
Update corporate records throughout the year to ensure accurate reporting
Maintain organized financial records for asset valuation and share tracking
Documentation Management
Keep detailed records of all authorized and issued shares
Maintain accurate asset valuations for assumed par value calculations
Document any changes in corporate structure or share arrangements
Preserve filing confirmations and payment receipts for your records
Professional Assistance
Consider working with qualified professionals for:
Complex corporate structures with multiple share classes
Corporations with significant asset holdings
Companies considering changes to authorized shares
Businesses with questions about calculation methods or compliance requirements
Conclusion
Delaware Franchise Tax compliance is a critical requirement for maintaining good standing as a Delaware corporation. Understanding both calculation methods, meeting annual deadlines, and maintaining accurate records ensures your corporation remains in good standing and avoids costly penalties.
The relatively modest annual cost of compliance far outweighs the potential consequences of non-compliance, which can include penalties, interest charges, loss of good standing, and the need for costly revival procedures.
For corporations with complex structures or significant assets, consulting with tax professionals can help optimize franchise tax obligations while ensuring full compliance with Delaware requirements.
This article provides general information about Delaware Franchise Tax and Annual Report requirements. Corporate tax obligations can be complex and subject to change. Always consult with qualified tax and legal professionals for advice specific to your corporation's situation.