There are a lot of reasons to incorporate in Delaware, and one of them is favorable tax treatment. There is, however, one corporate “tax” to be aware of for owners of Delaware corporations, and that’s the annual franchise tax filing. For most corporations, it’s little more than a fee for Delaware companies with their operations outside of the state, but the calculations themselves can be somewhat complicated. Failure to timely file results in a penalty of $200 plus interest accruing at 1.5% per month, and filings and payment can be made online with the Delaware Division of Corporations. Failure to file and pay the franchise tax fee for a year or more will result in the state declaring the company charter void or, eventually, repealed.
Most non-public companies use what’s called the “Authorized Shares” method of calculating the tax, which is based solely on the number of shares authorized. That tax is calculated as follows:
As noted, companies with fewer than 5,000 shares will always pay the minimum tax of $175 plus the filing fee of $50, since that’s the minimum amount possible.
Some companies (primarily companies with larger numbers of shares) may benefit from using the alternate calculation method, called the Assumed Par Value Capital Method. Basically, that method looks at both the number of shares issued and the total gross assets, and starts out at a minimum of $400 going up to $200,000 (or $250,000 for “Large Corporate Filers”). For more detail on that method, check out the Delaware Division of Corporations’ website.
Don’t confuse the franchise tax filing with the registered agent fee, which also typically becomes due around the same time of year. The registered agent fee is paid to a private vendor to serve as a sort of “official mailbox” for legal service and other compliance documents, and is required for all companies which do not have a physical presence of their own in Delaware. Failure to maintain a registered agent may also lead to suspension or repeal of the company charter.
The franchise tax form is pretty easy to complete for most companies, and is an annual reminder not to authorize more shares than you need (unless you like paying taxes).