Delaware franchise tax and annual fees for corporations and LLCs

A Delaware corporation files an annual report and pays franchise tax by March 1 each year. A Delaware LLC does not file that report. It pays a flat annual tax of $300 by June 1. The obligation comes from being formed in Delaware, whether or not the company operates there, has any revenue, or has any employees.

Copying a corporation calendar onto an LLC, or the reverse, is the usual way companies miss one of these.

Delaware's online system calculates the tax using the authorized shares method by default. That method looks at how many shares the charter authorizes, not how many have been issued. A startup that authorized 10 million shares to leave room for founders, an option pool, and future rounds can see a bill for $85,165, even if the company has almost no money.

The math is simple. The tax is $250 for the bracket from 5,001 to 10,000 shares, plus $85 for each additional 10,000 shares or portion of that. For 10 million shares that is $250 plus $85 times 999, which is $85,165.

Delaware also lets a corporation use the assumed par value capital method. It takes the company's total gross assets, divides by the number of issued shares to get an assumed par value per share, and multiplies by the authorized shares. The tax is $400 for each $1 million of that amount or portion of it, with a $400 minimum.

Take the same company with $500,000 in gross assets, 5 million issued shares, and 10 million authorized. The assumed par value is $0.10 per share, times 10 million authorized shares, which is $1 million. The tax is $400. The annual report has its own filing fee on top of it, currently $50.

You need the number of authorized shares from the charter, the number of issued shares from the cap table, and total gross assets from the balance sheet at the right date. That means legal, finance, and the cap table all have to agree. Use the Delaware Division of Corporations' current instructions for the filing year, since the amounts and brackets are published there.

Run both methods and pay the smaller one. The state will accept the lower figure if you submit the supporting information.

A late corporation filing carries a penalty and monthly interest. An unresolved report can put the company out of good standing, which causes trouble at financings and when a bank or buyer asks for a certificate of good standing. A corporation with a larger franchise tax liability is required to make installment payments during the year. If you grow into that range, put the installment dates on the calendar.

The LLC tax carries a $200 penalty if late, plus interest at 1.5 percent a month on the tax and the penalty.

Add both dates to the compliance calendar in January. Close the prior-year books so gross assets are final. Check the authorized and issued share counts against the cap table. Calculate under both methods and file. Keep the confirmation with the entity's permanent records. Ignore mailers that look like official notices from other companies. The real notices come from the Delaware Division of Corporations.