Delaware LLC Franchise Tax

Delaware is known as a business-friendly state for such reasons including its lack of residency requirements, favorable tax structures, legal flexibility, privacy protections, and other advantages. A less friendly aspect of having your LLC based in Delaware is its franchise tax, which is a fee that owners of Limited Liability Companies (LLCs) and some other types of business entities must pay each year for the privilege of having their companies located in the state.

Even if you formed your LLC in Delaware to take advantage of its business-friendly reputation but conduct all your business another state or states, you still must pay the franchise tax. The franchise tax isn’t based on income or how your company is structured or what it does—it’s simply an annual fee the state requires for your LLC to remain active and in good standing there.

Let’s take a closer look at Delaware’s franchise tax and what it means for your LLC.

Who Has to Pay the Delaware Franchise Tax?

All LLCs, Limited Partnerships, General Partnerships, and Corporations formed in Delaware are responsible for paying the franchise tax. Corporations also must file an annual report and a fee to file the report.

Certain types of companies, such as civic organizations or those organized primarily for charitable purposes, may be exempt from paying the franchise tax. Also, companies that are not registered with the state, such as Sole Proprietorships or General Partnerships, generally do not have to pay franchise taxes.

Because the franchise tax is not based on earnings or profits, a company must pay it even if it has not generated any income or operated at a loss.

How Much is the Tax?

All Delaware LLCs must pay a flat annual rate of $300. A Limited Partnership formed in Delaware also pays that flat annual rate, but the franchise tax for a Corporation is based on the type of Corporation and the number of authorized shares it has.

A Corporation can pay the lower tax generated by one of two calculation methods. The state uses the authorized shares method to calculate the tax, while a Corporation may choose to use the assumed par value capital method if it’s in its best interests to do so.

LLCs, with the flat annual rate, do not have to choose between calculation methods.

When is the Franchise Tax Due?

When a company must pay its franchise tax depends on the type of business entity it is:

• LLCs, Limited Partnerships, and General Partnerships must pay the annual fee by June 1
• Corporations must pay the franchise tax each year by March 1

The Delaware Division of Corporations provides a link you can use to access the form needed to pay your franchise taxes. You provide your business entity file number to begin the process of paying the franchise tax and filing the form.

Or you can seek the services of a company that specializes in filing services for LLCs and other business entity types.

What Happens if You Don’t Pay?

Not paying your annual franchise tax can result in serious consequences for your LLC.

First, you’ll be imposed a late fee of $200, plus 1.5% interest per month on top of your franchise taxes. Those fees can add up and threaten the financial well-being of your LLC.

Additionally, missing a payment triggers an alert that appears on your LLC’s record with the Delaware Division of Corporations. Even if you simply forgot about the franchise tax and pay it shortly after the due date, the notice of your failure to pay will remain on your record. That can harm your LLC’s reputation and discourage customers and vendors from wanting to do business with you. It also could make it difficult to obtain funding from lenders or investors.

An LLC that doesn’t pay its franchise tax for two years will automatically be placed on void status, which means it is no longer in good standing with the state. An LLC that’s been declared void loses is limited liability shield in Delaware, meaning your personal assets could be at risk.

If your franchise tax remains unpaid for three years, the state will administratively cancel your LLC, which means your business will be shut down. A business owner is sometimes able to reverse an administrative cancellation by paying off all taxes, fees, and interest and taking any other steps necessary to fix the problem, but the process can be complicated and expensive. If the issue is not addressed, the state can permanently shut down the LLC.

If you are ever in a situation in which you’re unable to pay your franchise taxes, be sure to file for a time extension and consult a tax attorney for advice.