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If you have a company formed in the state of Delaware, you may be interested to learn about the legislation that was approved by the General Assembly in July of 2017. House Bill 175 affects the annual Franchise Tax fees for entities incorporated in Delaware. The changes do not apply to Limited Liability Companies (LLCs) or Limited Partnerships (LPs), only to stock and non-stock corporations.
The first Franchise Tax change for corporations is that the Authorized Shares Method for calculating a Franchise Tax amount due will be modified. This is the method the state of Delaware always uses for the initial tax assessment. This formula arrives at a Franchise Tax Fee based on the number of shares the company has authorized. It is a graduated scale that increases based on the number of shares a company is allowed to issue.
The rate is $175 for a company with 5,000 authorized shares or less. A company with 5,001 to 10,000 authorized shares owes a fee of $250. Then there is a fee for each additional 10,000 shares or portion thereof—it is this fee that Delaware has increased, from $75 to $85.
For example, a corporation with 200,000 authorized shares owes $250 for the first 10,000 shares and an additional $1,615 ($85 times 19), for a total due of $1,865 (plus $50 for the annual report fee).
Delaware also has an alternative way to calculate the Franchise Tax fees due, called the Assumed Par Value Capital Method. Fortunately, the state allows corporations to pay the lessor amount due via the two methods. You can enter various figures and see the results of each method on our Franchise Tax calculator.
The second change made by the state is that under the Assumed Par Value Capital Method, the minimum amount of annual Franchise Tax Fee that can be paid via this method is increasing from $350 to $400. You also have to add the $50 annual report fee, which makes the total minimum amount due $450 per year under this method. Please note that even with this small increase, the amount is still far less than some other states that charge up to $800 for their annual fees.
To review, here are the Delaware Corporation Franchise Tax fees that are changing as of 1/1/2018:
PLEASE NOTE: THE $50 ANNUAL REPORT FEE MUST STILL BE ADDED TO YOUR FRANCHISE TAX FEE.
The state has established a Tier 2 class of taxpayers. These “large corporate filers” will have a maximum Franchise Tax assessment of $250,000 per year. A company is considered a “large corporate filer” if it meets certain conditions. These conditions are:
For example, a company with $800 million in revenue and $300 million in assets would classify as a “large corporate filer” and would thus owe $250,000 in annual Franchise Tax. However, a company with $800 million in revenue and $100 million in assets would not fall into this category, since the assets are less than the $250 million threshold.
As mentioned above, there are two methods by which you can calculate Franchise Tax fees. The state determines how much you owe via these two different methods, and you owe the lesser amount.
However, as of January 1, 2017, the ability to recalculate the Franchise Tax assessment will not be an option for entities that are now classified as “large corporate filers.” Those corporations will owe $250,000 in Franchise Tax, and this amount cannot be adjusted or reduced.
The state will research various public records to determine which entities will be placed into this Tier 2 category. These specific companies will receive an individual Franchise Tax notice, which will outline the details of the Franchise Tax assessment and options for making payment arrangements. These notices will be sent to the new Tier 2 companies by their Registered Agents in December of each year, prior to the March 1 deadline for corporation Franchise Tax. Each entity will still need to complete an annual report as well as make a full payment by this due date.
Out of the over one million companies formed in the state of Delaware, it is estimated this new Tier 2 classification will only affect about 1,900 tax filers. While it may be just a small group of entities, the increased rate is expected to bring in (at least) an additional $100 million in annual revenue.
As always, our experienced Franchise Tax associates are available to help with any questions you may have in regard to your company’s specific needs.
*Disclaimer*: Harvard Business Services, Inc. is neither a law firm nor an accounting firm and, even in cases where the author is an attorney, or a tax professional, nothing in this article constitutes legal or tax advice. This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances. Any action taken or not taken based on this article is at your own risk. If an article cites or provides a link to third-party sources or websites, Harvard Business Services, Inc. is not responsible for and makes no representations regarding such source’s content or accuracy. Opinions expressed in this article do not necessarily reflect those of Harvard Business Services, Inc.
There are 3 comments left for Delaware’s New Corporation Franchise Tax FeesDavid Tseng said: Friday, April 12, 2019
I read something about under Section 204 of the Delaware General Corporation Law a company can retroactively ratify mistakes through action that, prior to the adoption of Section 204 of the Delaware General Corporate Law in 2013, would have been deemed invalid as well as a financial and logistical mess to correct. Would this apply to amending authorized shares? Thanks again very much for your help.HBS Staff replied: Monday, April 15, 2019
David, we have forwarded your question to our Filings team and they will be following up with you via email shortly.David Tseng said: Friday, April 12, 2019
Is it possible to amend the number of authorized shares retroactively in order to save Delaware Franchise Tax? My example is a new C corporation which was set up in 2018, and it just received a huge tax bill from the State of Delaware. We just realized that the corporation didn't need so many authorized shares. So can we amend the Article of Incorporation to lower the number of authorized shares for year 2018 now in order to lower the tax bill for year 2018?HBS Staff replied: Friday, April 12, 2019
David, unfortunately the authorized shares and Certificate of Incorporation cannot be retroactively changed. Delaware does allow you to file a correction ot the original certificate, but the cost of that is $450 and generally still requires you to pay the current outstanding Franchise Tax balance. Similarly, you could file a stock amendment to correct this going forward, but that fee is also $450 and also means you'll have to pay your 2018 bill.
One other alternative is to form a whole new company with the correct information and allow the current company to go void. However, this would require filing the new company with a new name.
Please give us a call at 1-800-345-2677, Ext 6904 if we can be of further assistance.Eden David Sarfaty said: Tuesday, December 19, 2017
What about non-stock corporations?HBS Staff replied: Wednesday, December 20, 2017
Yes, it applies to non-stock corprorations as well as stock corporations.