Delaware Franchise Tax: Calculation, Deadlines, and Exemptions

The Delaware franchise tax is an annual fee every corporation, LLC, limited partnership, and general partnership formed in Delaware pays for the privilege of existing as a Delaware entity, regardless of where it operates or whether it earns a dollar of revenue.¹ For corporations, the tax ranges from a $175 minimum to a $200,000 maximum ($250,000 for Large Corporate Filers), calculated under one of two methods. For LLCs, LPs, and GPs, it’s a flat $300.² The tax is not based on income.

Who Owes the Tax

Every corporation incorporated in Delaware owes franchise tax each year, from the day the certificate of incorporation is filed until the corporation is formally dissolved or its charter is voided for non-payment.¹ This covers C corporations, S corporations, and publicly traded companies. Where the company does business, and whether it does any business at all, is irrelevant.

Delaware LLCs, LPs, and GPs don’t go through the corporate calculation. They owe a flat $300 annual tax due by June 1, and they don’t file an annual report with the Division of Corporations.² The $300 applies to both domestic and foreign LLCs, LPs, and GPs registered in the state.

Corporations formed in another state but registered to do business in Delaware are a separate case: no franchise tax, but an annual report and a $125 filing fee are due June 30 each year, with a $125 penalty for missing the deadline.³

How Corporations Calculate the Tax

Delaware offers two calculation methods, and the state automatically bills whichever produces the lower result.⁴ There’s one trap: using the lower-of-two option requires submitting financial data with the annual report. Leave it off, and the state defaults to the Authorized Shares Method, which is often far more expensive.

Authorized Shares Method

This method looks only at the number of shares the corporation is authorized to issue, not how many have actually been issued. The tiers:

5,000 shares or fewer: $175 (the minimum)
5,001 to 10,000 shares: $250
Each additional 10,000 shares or portion of 10,000: add $85

The cap is $200,000, or $250,000 for Large Corporate Filers.⁴ A corporation authorized to issue 10 million shares would owe roughly $85,000 under this method, even if almost none of those shares had actually been sold. That gap between authorized and issued shares is why the second method exists.

Assumed Par Value Capital Method

This method factors in the corporation’s real financial size. Total gross assets come from the figure reported on the federal tax return (Form 1120, Schedule L) for the fiscal year ending in the prior calendar year.⁵

Divide total gross assets by issued shares to get an assumed par value per share. Multiply that assumed par value by total authorized shares. The tax is $400 for each $1 million of that result, or any fraction of $1 million.³ The minimum under this method is $400; the maximum is the same $200,000 (or $250,000 for Large Corporate Filers).

This method tends to favor corporations that authorized many shares but hold modest assets. A startup authorized for 10 million shares but holding $500,000 in assets will owe far less this way than under the Authorized Shares Method. The price of admission is remembering to include the financial data at filing time.

Deadlines and Quarterly Payments

Domestic corporations must file an annual franchise tax report and pay the tax by March 1 each year. The report lists the names and addresses of all directors and the officer who signs it. Even exempt corporations that owe no tax must file; the filing fee is $25 for exempt corporations and $50 for everyone else, on top of any tax due.¹

Reports go through the Division of Corporations online portal. Payment is by credit card, electronic check, or wire transfer. The annual notification is mailed to the corporation’s registered agent, so that address needs to stay current.⁶

Any corporation expecting to owe $5,000 or more in franchise tax for the current year has to make estimated quarterly payments instead of paying the full amount on March 1:

June 1: 40% of the estimated annual tax
September 1: 20%
December 1: 20%
March 1 of the following year: the remainder

This isn’t just for the largest filers. A corporation owing $8,000 is on the same quarterly schedule as one owing $200,000.⁶

LLCs, LPs, and GPs pay their flat $300 by June 1.²

Penalties and Loss of Charter

Missing the March 1 corporate deadline triggers an immediate $200 penalty, plus interest of 1.5% per month on the combined unpaid tax and penalty. That compounds fast: a $10,000 bill left unpaid for a full year accrues roughly $1,800 in interest on top of the $200 penalty.³

Leave the tax unpaid for a year and the consequences escalate sharply. Delaware law voids the charter and declares all corporate powers inoperative.⁷ A voided corporation can’t do business, enter contracts, or file lawsuits in Delaware courts. It can still be sued. Creditors and plaintiffs can pursue claims while the company has no standing to defend itself or assert its own rights until it reinstates.

Reinstatement means paying all back taxes, accumulated penalties, interest, and the filing fee for a Certificate of Revival. Before filing anything, the corporation should contact the Franchise Tax Section at the Division of Corporations for an exact accounting of what’s owed.¹ After several years of non-compliance, the total can easily reach thousands of dollars.

For LLCs, three consecutive years of non-payment of the $300 annual tax causes the Secretary of State to cancel the certificate of formation.⁸

Ending the Obligation

Shutting down operations does not end the franchise tax. As long as the charter exists in Delaware, the tax accrues every year. To stop it, a corporation must file a Certificate of Dissolution with the Secretary of State, and all outstanding taxes and annual reports have to be current before the state will accept it. Franchise tax is prorated in the year of dissolution, so a corporation that dissolves mid-year owes tax only for the portion of the year it existed.⁷

LLCs that are winding down file a Certificate of Cancellation. Letting the entity lapse by simply not paying is a costly mistake. Penalties and interest keep accumulating during the dormant years, and the owners carry those costs if they ever decide to reinstate or properly close the entity.

Exemptions

Some corporations are exempt from the tax itself but still must file an annual report with the reduced $25 fee. The main qualifying categories are federal tax-exempt organizations under Section 501(c) of the Internal Revenue Code, religious and charitable corporations, nonprofit corporations where no earnings benefit any member or individual, and membership benefit societies that assist sick, needy, or disabled members, cover funeral expenses, or support families of deceased members. Qualifying civic, charitable, and fraternal organizations are also included.⁹ Banking corporations, savings banks, building and loan associations, Delaware-licensed captive insurance companies, and drainage and reclamation corporations are excluded from the tax as well.

Exempt status isn’t automatic. The corporation applies through the Division of Corporations and provides documentation. The annual report still has to be filed every year to stay in good standing.

Federal Deductibility

Delaware franchise tax is deductible on the federal corporate return as an ordinary and necessary business expense, because it’s a fee for the privilege of incorporation rather than an income tax.¹⁰ The deduction applies regardless of which calculation method was used and regardless of whether the corporation does any business in Delaware. It’s claimed in the year the tax is paid or accrued, depending on the company’s accounting method.

1
Delaware Division of Corporations. Annual Report and Tax Information
2
Delaware Division of Corporations. LLC/LP/GP Franchise Tax Instructions
3
Delaware Division of Corporations. Annual Report and Tax Instructions
4
Delaware Division of Corporations. How to Calculate Franchise Taxes
5
Delaware Division of Corporations. Frequently Asked Tax Questions
6
State of Delaware. Franchise Taxes – Division of Revenue
7
Delaware Code. Delaware Code Title 8, Chapter 5 – Corporation Franchise Tax
8
Justia Law. Delaware Code Title 6, Chapter 18, Section 18-1108 – Cancellation of Certificate of Formation for Failure to Pay Taxes
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Justia Law. Delaware Code Title 8, Chapter 5, Section 501 – Corporations Subject to and Exempt From Franchise Tax
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Office of the Law Revision Counsel. 26 U.S. Code 162 – Trade or Business Expenses