The Delaware Franchise Tax can be a complex issue for startups – and sometimes small companies get surprisingly high franchise tax bills. If your franchise tax seems high, check with a startup accountant before you write a check!
Most entrepreneurs are not tax experts so the filing can be a little confusing. It’s important to file on time so your startup can avoid penalties.
Staying in compliance preserves your company’s liability shield. If you lose your corporate status, the officers of the company can face even more liability if something goes wrong.
Since we know clients are not tax experts, we created this list of reasons why a company’s Delaware Franchise Tax filing could be incorrect so it’s a little less ambiguous or scary if something is wrong:
- Incorrect assets: Overstating assets can result in an incorrect Delaware Franchise Tax filing.
- Incorrect authorized shares reporting: Reporting authorized shares incorrectly to the state can result in an incorrect tax filing. For example, a company may report 17,280,000 authorized shares, but the Delaware records show only 1,728,000 authorized shares.
- Inaccurate capitalization table: A company’s capitalization table is a key component of calculating the Delaware Franchise Tax. If the capitalization table is inaccurate, it could result in an incorrect tax filing.
- Lack of Delaware approval for payment: If a company does not have Delaware approved for payment in their bank, the payment may be blocked, and the tax may never be paid.
- Failure to pay estimated taxes: If a company’s taxes are $5,000 or more, they will have to pay quarterly estimated taxes. Failure to pay estimated taxes during the year can result in an incorrect tax filing.
- Discrepancies in asset reporting: If Delaware does not agree with the assets reported, they may apply a large balance due until they receive tax return information to verify.
- Failure to file an annual report: Failure to file multiple annual reports will place the company out of good standing. Simply submitting and paying the missing filings and tax will not correct this. Your company will also need to submit a certificate of revival to bring you back to compliance.
- Incorrect calculation of the tax: The Delaware Franchise Tax is based on a complex formula that takes into account a company’s assets, gross receipts, and authorized shares. An error in any part of this calculation can result in an incorrect tax filing.
- Failure to file in a timely manner: The tax is due on March 1st each year. Failure to file in a timely manner can result in penalties and interest. Currently Delaware is charging a $200 Penalty plus 1.5% interest per month on tax and penalty.
- Incorrect identification of the company type: Different types of companies are subject to different DE Franchise Tax rates. If a company is incorrectly identified as a different type of company, it could result in an incorrect tax filing.
- Maintaining your Delaware Registered Agent: Each company incorporated in Delaware must have a Delaware registered agent. It’s important to pay their fee every year. Also, make sure your registered agent has the correct contact information on file for your company. Delaware typically will only reach out to your Registered Agent on file.
Kruze is always happy to help our clients with issues around Delaware and Franchise Tax. Hopefully this list makes things less complex and scary. And use our DE Franchise Tax Calculator to estimate your payments - hopefully it’s not as high as you fear!
