Delaware Franchise Tax Explained

CRYSTAL STRANGER , EA, INTERNATIONAL TAX DIRECTOR , CLEER TAX & BOOKKEEPING

15 Dec 2022

Who has to file Delaware Franchise Tax?

Any company incorporated in the State of Delaware, regardless of ownership, must file every year by March 1st, or receive an automatic $200 penalty (with interest at 1.5% per month for any unpaid tax balance). Delaware assesses an annual franchise tax for the privilege of doing business in the state. This return or “Annual Report” must be filed with the state of Delaware each year.

Why do we need to pay Delaware Franchise tax if we have no revenue?

It is the cost of being a Delaware Corporation. All corporations registered in the State of Delaware, regardless of their income or activity of the business itself will need to file this annual report and pay it’s annual franchise tax by March 1, or they will be assessed penalties moving forward.

Make sure you have shares issued for your Delaware corporation before year-end

Every year, we hear from first-year Delaware startups shocked after receiving a tax bill in the mail for as much as $150,000! If the Delaware Franchise tax return is not prepared correctly, or if zero assets are claimed year over year, then Delaware will send you a tax bill using the Authorized Shares Method by default, which typically runs over $150,000 now when 10,000,000 shares are authorized.

How many shares should I issue for my Delaware corporation?

It is generally recommended to issue in the range of 50-80% of the authorized shares to the founding shareholders. Issuing at least 50% (i.e. 5 million shares) will keep the Delaware tax at a reasonable amount. By keeping at 20-30% un-issued will allow a pool of shares for establishing stock options for early hires and allows for flexibility if you need to hire other early stage team members you had not anticipated in hiring.

Does my corporation need to specify other classes of stock?

For most corporations, there will only be one class of shares – “common stock”. When a company is ready for equity financing, some investors may request preferred shares, or founders will request shares with special voting rights, so then there will be two or more classes of stock (typically done when you raise a priced round). These classes of stock often trigger higher Delaware Franchise Taxes because the assumed par value will be calculated separately for each class of stock. Then the value will be calculated for each class of stock, and summed together, creating an overall higher tax.

Why is Cleer the best accountant to prepare Delaware Franchise Tax?

While Gust provides guides and videos on how to file your annual report (and pay your franchise taxes), that is just one part of a DE C Corp’s tax obligations. For those founders that want to connect and work with a tax expert, Cleer makes it simple, and can advise companies on all things tax starting with franchise taxes, state compliance, and corporate taxes. You’ll even get a discount if you’re a Gust Launch customer.

Gust Launch automatically notifies and helps you minimize your franchise tax each year.

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