Delaware taxes all domestic corporations according to their authorized share capital and calculates franchise tax using two methods.
An outstanding Franchise Tax payment remains on your record with the Division of Corporations for at least 3 years and could deter potential investors or lenders from considering your business. The penalty for late payment is $200 with 1.5% interest added each month that it remains unpaid.
Failure to File Annual Reports
The State of Delaware mandates that all Delaware corporations pay a franchise tax and file an annual report with its Division of Corporations. The annual reports must disclose all workplaces, names and titles of directors, addresses and information current as of when filing occurs. If payments are late by more than seven days, an administrative penalty of $200 applies and 1.5% interest accrues each month until payment is made in full.
By staying current on annual report filings and franchise taxes, staying ahead of any time-sensitive filings that must be made in Delaware or anywhere else where you conduct business will reduce frustration when other filings need to be submitted by their due dates. A reliable registered agent can manage these filings on your behalf to ensure all necessary data is submitted on schedule.
Delaware allows businesses to calculate their franchise tax using either the Authorized Shares Method or Assumed Par Value Capital Method, once they receive their tax statement they can select which method they’d like to use to determine how much owing them.
Failure to Pay Franchise Tax
Many business owners feel disillusioned with the Delaware Division of Corporations because it requires many filing deadlines and requirements that businesses need to fulfill, such as annual reports and franchise tax filings for various entity types. But this view could be accurate: they require business filing deadlines that often are missed; thus contributing to feelings of apathy from owners who want their operations running as efficiently as possible.
If an LLC/LP misses its franchise tax payments for three consecutive years (for LLC/LPs), or two consecutive years for corporations, the state will administratively cancel these entities, forcing the entity to undergo an expensive renewal/revival process to restore good standing.
Failing to file and pay annual reports and franchise taxes could result in fines ranging from $200 for domestic non-exempt corporations, nonprofits, LLCs and LPs (domestic) to $300 (foreign non-exempt). Furthermore, states will charge 1.5% interest on late fees, making it even more important for them to keep filing their reports and taxes promptly.
Failure to File a Certificate of Good Standing
Certificates of Good Standing issued by the state provide proof that an entity is current with its franchise taxes and annual reports; investors and banks often require this document.
Failure to file the required report exposes owners personally to liability and makes it more difficult or impossible for their company to open bank accounts or enter contracts. Furthermore, after two years of missed franchise tax payments and annual reports without an adequate renewal/revival plan in place the State may declare them “void” necessitating an expensive renewal/revival process.
Before the State will reinstate a company that is no longer active, franchise tax and late fees owed must be paid off, plus interest. This can be very expensive for small firms with limited assets. Furthermore, until all pending filings (such as amendments mergers conversions etc) have been approved they cannot get their new certificate of good standing which prevents important plans such as seeking investment or selling its business being undertaken.
Failure to File a Certificate of Dissolution
Once you decide to dissolve your company, it is imperative that a Certificate of Dissolution be filed with the state. Doing this will prevent future fees and penalties while also guaranteeing any outstanding taxes are settled in full.
Delaware requires all companies, regardless of profitability or capitalization, to pay an annual franchise tax of $100.00 based on authorized shares and assumed par value capital. This fee must be paid regardless of profit or loss for business operating within Delaware.
Before filing the certificate of cancellation, any outstanding taxes must be settled and any bank or credit lines held under your company name should be closed down.
If your company fails to file its annual reports or franchise tax on time, Delaware law will consider your business entity void and cancel it, leaving no ability for operations such as maintaining a Registered Agent and complying with other obligations to continue as usual. It will also make way for someone else forming another business using your same name.
