What is Delaware Franchise Tax?

“The Delaware franchise tax is an annual fee that businesses incorporated in the state of Delaware are required to pay to maintain their legal status and the benefits of Delaware incorporation. It is a significant source of revenue for the state of Delaware. The franchise tax applies to both corporations and limited liability companies (LLCs) and is calculated based on different methods depending on the type of entity.

There are two primary methods for calculating the Delaware franchise tax:

1. Authorized Shares Method: This method is primarily used for calculating franchise tax for corporations. The fee is based on the total number of authorized shares a corporation has, regardless of whether those shares are issued or outstanding. The tax rate varies depending on the number of authorized shares, and there are different brackets with different tax rates. Corporations must pay this tax even if they are not generating significant revenue.

2. Assumed Par Value Capital Method: This method is used for calculating franchise tax for both corporations and LLCs. It is based on a more complex formula that takes into account the assumed par value of the company’s total assets, including real and tangible personal property, in Delaware. The tax rate varies based on the assumed par value capital, and it is generally higher for larger companies.

It’s important to note that the Delaware franchise tax is separate from the federal income tax and is not based on the company’s profits or income. Instead, it is an annual fee imposed by the state to maintain the benefits of Delaware incorporation, which include favorable corporate laws, strong legal protections, and a well-established corporate infrastructure.

The specific franchise tax amount that a company owes can vary widely based on factors such as the company’s structure, the number of authorized shares, and the value of its assets. It’s essential for businesses to calculate and pay their franchise tax correctly and on time to maintain good standing with the state of Delaware. Failure to do so can result in penalties, interest charges, and, ultimately, the loss of good standing, which may have legal and operational consequences. Many businesses work with registered agents or tax professionals to ensure compliance with Delaware’s franchise tax requirements.”