What Happens When You Don’t Pay Your Franchise Tax?
To maintain a Delaware Corporation, Delaware LLC, or Delaware LP, the State of Delaware has just a few requirements. They need to maintain a registered agent physically located within the State of Delaware, pay their Delaware Franchise Tax, and file an annual report. But what happens if you don’t meet all these requirements? When this tax is missed, several issues may start to compound. Late payments can lead to penalties, interest, loss of good standing, and, in more serious cases, the company becoming void or inactive on state records. Let’s dig a little deeper into what happens when franchise tax is not paid and why it is important to address the issue as soon as possible.
Paying Your Franchise Tax
Delaware franchise tax is paid to the Delaware Division of Corporations to keep a business entity compliant with the state. All Delaware corporations are required to file an Annual Report and pay franchise tax unless they are exempt. Delaware LLCs and LPs do not file an Annual Report, but are still required to pay a flat annual tax.
For corporations, the amount depends on the company’s stock structure and may be calculated using the Authorized Shares Method or the Assumed Par Value Capital Method. For Delaware LLCs and LPs, the annual tax is generally a flat $400. This amount is usually paid online through the Delaware Division of Corporations website. A Delaware corporation typically files its Annual Report and pays franchise tax by March 1 each year. A Delaware LLC or LP pays its annual tax by June 1 each year.
Consequences of Not Paying Franchise Tax
Failing to pay Delaware franchise tax can create both immediate and long-term problems for a company. Below are some of the most common consequences business owners should understand.
Late Penalties
The first consequence of missing the Delaware franchise tax deadline is a late penalty. Delaware corporations that fail to file their Annual Report and pay franchise tax on time are charged a $200 penalty. Delaware LLCs and LPs that fail to pay their annual tax by the June 1 deadline are also charged a $200 penalty. This penalty is added on top of the original amount owed.
Monthly Interest
In addition to the late penalty, unpaid franchise tax can continue to grow because of interest. Delaware generally charges interest at 1.5% per month on unpaid franchise tax balances. For LLCs and LPs, interest may apply to both the unpaid tax and the penalty. The longer the tax remains unpaid, the more expensive it can become to bring the company back into compliance.
Loss of Good Standing
A company that does not pay its franchise tax may lose its good standing with the Delaware Division of Corporations. Good standing means the company has met its basic state compliance obligations, including required taxes, reports, and registered agent requirements. If the entity falls out of good standing, Delaware usually requires all back taxes and filing fees to be paid before the company can return to good standing.
Problems With Banks & Lenders
Losing good standing can create practical problems for the business. Banks, lenders, investors, and other third parties may ask for proof that the company is active and compliant before approving financing or moving forward with a major transaction. If the company cannot obtain a Certificate of Good Standing, these processes may be delayed until the unpaid taxes and interest are resolved.
The Company May Become Void
If franchise tax remains unpaid for too long, the company may eventually become void. For Delaware corporations, if a corporation neglects or refuses to pay franchise tax or file a complete annual franchise tax report for one year, the corporation becomes void, and its corporate powers are declared inoperative.
Delaware Franchise Tax Status
If you are unsure whether your Delaware franchise tax has been paid, you can check your company’s status through the Delaware Division of Corporations. The Division offers an online entity status search with tax and filing history information.
You can also contact your Delaware Registered Agent, since annual franchise tax notices are typically sent to registered agents. For corporations, confirming payment may also involve checking whether the Annual Report was filed.
Restoring the Company
If a Delaware company has fallen out of good standing because of unpaid franchise tax, the issue can still be fixed. The first step is to determine the company’s current status with the Delaware Division of Corporations and confirm the total amount owed. This may include unpaid franchise tax, late penalties, monthly interest, and any required filing fees. If the company is simply behind on payments, it may be able to return to good standing by paying the overdue balance and filing any missing documents. For Delaware corporations, this often means filing any missing Annual Reports in addition to paying past-due franchise taxes and penalties.
If the company has already become void or forfeited, additional renewal or revival paperwork may be required. In that case, the company may need to file revival documents with the Delaware Secretary of State and pay all outstanding amounts before the entity is restored. Once the required documents are accepted and the outstanding balance is paid, the company can generally return to good standing.
FAQs
Will unpaid franchise tax affect my Certificate of Good Standing?
If a company has unpaid Delaware franchise tax, it might not be able to obtain a Certificate of Good Standing. Delaware allows businesses to check entity status online, but an official certificate must be requested from the Division of Corporations. Unpaid taxes or missing reports should be resolved before requesting one.
Do I owe Delaware franchise tax if my company made no money?
Yes. Delaware franchise tax is generally owed based on the company’s existence as a Delaware entity, not whether the business earned income. Delaware LLCs and LPs will usually owe the annual tax if they were active on Delaware’s records at any time during the tax year. To stop paying your Delaware franchise tax, you may need to cancel your business.
Can I dissolve a company with unpaid franchise tax?
Usually, unpaid franchise tax must be addressed before a company can be properly dissolved or canceled. For Delaware corporations, this may include filing missing Annual Reports and paying any outstanding taxes or penalties. LLCs generally must also pay outstanding annual tax before completing the cancellation process.
Form Your Company with HBS
If you have any questions about forming your new Delaware LLC, LP, or Corporation, reach out to info@delawareinc.com or 800-345-2677 ext 6900. As your registered agent, our team can help you pay your franchise taxes and ensure that you remain in good standing.
*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.
More By Andrew Millman
![]()
Email this article to a friend
There is 1 comment left for What Happens When You Don’t Pay Your Franchise Tax?
luis canelo said: Wednesday, February 15, 2023With the point 3. File an Annual Report Delaware corporations only. You are required to report the principal place of business, names, titles, and addresses for ALL Directors, and the name, title and address for ONE Officer. The State of Delaware also requires the up-to-date figures for gross assets and issued shares. Do you do this as part of the Agent's responsibilities, and how can i be sure if i have been doing this the past years?
HBS Staff replied: Friday, March 10, 2023Hi Luis,
Yes all of this information is completed on the Annual Report and we offer a service to help assist you in filing the report with Delaware. Our team can look to see if you are up to date with filing the annual reports as we have a direct electronic connection with the State of Delaware.