Startups typically incorporate as Delaware C-Corps because it provides significant tax and legal benefits. As a Delaware C-Corp, your startup is required to calculate and pay a Delaware franchise tax. However, we occasionally see some of these tax filings get rejected, and there are two main reasons that happens.
Using a virtual mailbox can cause your Delaware franchise tax filing to be rejected. The state of Delaware requires that a company uses a physical address and will not accept any virtual mailboxes. This is because they want to know from where your company is actually operating, and they require a physical location.
They are pretty smart about the different virtual mailbox services out there and the different iterations that startups tend to use, such as Earth Class Mail. So they will definitely know if you are using one.
Now, here at Kruze, we actually recommend using a virtual mailbox and you can learn more about why here. However, in this circumstance you need to have a physical address or your tax filings will be rejected. Having them rejected means you will have to pay late fees and you risk losing your corporate liability shield.
As a last resort, if a startup is only operating out of a virtual mailbox, the CEO can list their personal address. This is not ideal, as not everyone wants their address listed on the Delaware franchise tax site, but it may be your only option.
The second major reason that franchise tax filings are rejected in Delaware is bad bank accounts. Frequent mistakes that startups make include:
These mistakes happen quite frequently, and it can seriously delay your tax filing. Your accountant thinks everything is correct and has received confirmation of your tax filing, and then discovers a week later that the account is closed or there’s no money in it to pay the tax. Now your tax filing is late, and you may owe fees on top of the tax.
These mistakes are easily avoided if you are careful. So, if you are a client filing your franchise tax in Delaware:
If you have any questions on Delaware franchise tax filings, valuations, startup investing, startup accounting, taxes, or venture capital please contact us. You can also follow our youtube channel and our blog for information about accounting, finance, HR, and taxes for startups!
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