Top 10 Corporation & LLC Franchise Tax Questions

By Amy Fountain Tuesday, February 2, 2016

top 10 franchise tax questions

Updated on 10/6/17

Whether it was to fulfill a dream or purely for investment purposes, you established a Delaware company, and now you may have concerns regarding the maintenance of your business entity and what you are required to do for it on a regular basis.

One of the annual requirements is the filing of an annual Delaware Franchise Tax report.  Don’t let either word—“franchise” or “tax”—frighten you; Harvard Business Services, Inc. is here to answer the Top 10 Franchise Tax questions.

1. What is Franchise Tax? The term may make it seem like you own a Chipotle or Pizza Hut franchise, but that is not the case at all. “Franchise Tax” is just the term the Delaware Secretary of State gave to the annual fee.

2. Do I have to pay the Franchise Tax?  Yes. Every business entity that is formed in Delaware is required to pay Franchise Tax each year. 

3. Do I still owe Franchise Tax if my company does not have any profits that year?  Yes. Your company owes Franchise Tax every year, regardless of whether or not your company has started making money, opened a business bank account or filed a federal tax return. If your company is formed in the state of Delaware, you must pay the annual Franchise Tax.

4. Do I have to pay the tax if I just formed my company? Yes. The state levies the Franchise Tax in the same fashion as the IRS levies your income tax, meaning it is paid in arrears. So if you formed your company this year, the first Franchise Tax filing will be due the following year. You do not have to pay the Franchise Tax in the same year that your company was established.

5. Is the Franchise Tax the same as federal income tax? No. Delaware Franchise Tax is completely separate from your federal income tax filing. We will gladly provide assistance with your Delaware Franchise Tax filing; however, you will need to consult your CPA or Accountant for assistance with your federal income tax filing.

6. How much is my Franchise Tax? The amount due is dependent upon several variables.  If your company is an LLC or LP, then the standard, flat rate is $300 per year. If your company is a corporation, then the amount due will be between $225 and $200,000 annually. The exception would be an exempt entity, such as a religious organization, church or foundation, which only has to file an annual report at a reduced rate of $25. 

7. Why is the corporation Franchise Tax bill so high? Don’t fret—the vast majority of corporations pay somewhere between $225 and $400 for their Franchise Taxes each year.  Click here for a calculator to generate an estimate on how much your taxes may be.

8. When is the Franchise Tax due? The fee for a corporation is due by March 1 of every year; the fee for an LLC or LP is due by June 1 annually.

9. What happens if I don’t pay by the deadline? The state of Delaware will assess a late penalty, plus interest, for all late filings. For a corporation, the late penalty is $200 plus 1.5% monthly interest; for an LLC, the late penalty is $200 plus 1.5% monthly interest.

10. How can I file and pay my company’s Franchise Tax?  Just go to www.delawareinc.com/payft and complete the online form. 

 

Disclaimer

THE AUTHOR OF THIS BLOG ARTICLE IS NOT A LAWYER AND HARVARD BUSINESS SERVICES, INC. IS NOT A LAW FIRM. THE ARTICLE ABOVE IS NOT INTENDED AS LEGAL ADVICE AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. THIS SHORT ARTICLE IS STRICTLY TO MENTION SOME ASPECTS OF DELAWARE’S CORPORATION LAWS AND/OR LAWS RELATING TO OTHER FORMS OF ENTITIES WHICH YOU MAY NOT BE FAMILIAR WITH. WE RECOMMEND THAT YOU CONSULT WITH A LAWYER BEFORE FORMULATING A STRATEGY WHICH WILL BE SUITABLE FOR YOUR SPECIFIC CASE.

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There are 2 comments left for Top 10 Corporation & LLC Franchise Tax Questions

James Cardwell said: Friday, August 3, 2018

I understand the normal procedure to review and apply the TOTAL ASSETS as found on Schedule L of the Form 1120. This is the standard procedure and referenced in the statutes you provided above. In its purest sense, a Parent Company is owed money from a subsidiary will show up in Total Assets and affect the Franchise Tax Calculations. In a consolidated return, it would be eliminated. At the end of the statute you provided, it says "at a value determined in accordance with GAAP" --- Thiis implies one could take a lessor amount than was is on the Federal Tax Return. Many times this debt is worthless, but stays on the books. Are companies truly penalized for these dead inter-company assets. Is there no relief?

HBS Staff replied: Tuesday, August 14, 2018

James, here are the details regarding consolidating filing directly from the Delaware Law:

As used in subsections (a) and (b) of this section, the term "total assets" and the term "total gross assets" are identical terms and mean all assets of the corporation, net only of allowances for bad debts, accumulated depreciation, accumulated depletion, accumulated amortization of land and accumulated amortization of intangible assets.

Such total assets and total gross assets shall be those "total assets" reported to the United States on U.S. Form 1120 Schedule L, relative to the company's fiscal year ending in the calendar year prior to filing with the Secretary of State pursuant to this section. If such schedule is no longer in use, the Secretary of State shall designate a replacement. The Secretary of State may at any time require a true and correct copy of such schedule to be filed with the Secretary of State's office. If such schedule or its replacement reports on a consolidated basis, the reporting corporation shall submit to the Secretary of State the consolidating ending balance sheets which accompany such schedule as a reconciliation of its reported total assets or total gross assets to the consolidated total assets reported on the schedule.

Interests in entities which are consolidated with the reporting company shall be included within "total assets " and "total gross assets " at a value determined in accordance with generally accepted accounting principles.

Jay said: Tuesday, February 27, 2018

I know that you cannot file a Consolidated Franchise Return like a Federal 1120 Consolidated Tax Return, but many companies have "INTERCOMPANY" loans, Due from Affiliates, etc. on the balance sheet of the Holding Company. I was told that one is supposed to exclude these INTERCOMPANY assets from TOTAL ASSETS, but cannot find an authoritative rule. Is this allowed? it seems like it should otherwise a Holding Company could pay a lot in taxes and then so would each subsidiary.

HBS Staff replied: Monday, March 5, 2018

Here is what the state of Delaware law says about consolidation for FT reporting purposes:

The term "total assets" and the term "total gross assets" are identical terms and mean all assets of the corporation, net only of allowances for bad debts, accumulated depreciation, accumulated depletion, accumulated amortization of land and accumulated amortization of intangible assets.

Such total assets and total gross assets shall be those "total assets" reported to the United States on U.S. Form 1120 Schedule L, relative to the company's fiscal year ending in the calendar year prior to filing with the Secretary of State pursuant to this section. If such schedule is no longer in use, the Secretary of State shall designate a replacement. The Secretary of State may at any time require a true and correct copy of such schedule to be filed with the Secretary of State's office. If such schedule or its replacement reports on a consolidated basis, the reporting corporation shall submit to the Secretary of State the consolidating ending balance sheets which accompany such schedule as a reconciliation of its reported total assets or total gross assets to the consolidated total assets reported on the schedule.

Interests in entities which are consolidated with the reporting company shall be included within "total assets " and "total gross assets " at a value determined in accordance with generally accepted accounting principles.

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