Delaware's franchise tax is an annual fee that Delaware corporations and certain other business entities pay to the state to remain authorized to do business there

The Delaware franchise tax is not an income tax. It is a yearly registration fee that Delaware charges to corporations, limited liability companies (LLCs), limited partnerships, and other business entities incorporated or formed in Delaware. The amount you owe depends on which tax calculation method you choose and the size of your business. Even if your company makes no money in a given year, you still owe the franchise tax to keep your business legally active in Delaware.

Delaware uses the franchise tax as its primary way to fund state government instead of relying on corporate income tax. This is why many businesses incorporate in Delaware even if they operate elsewhere — the state offers legal advantages and, for some companies, lower overall tax costs than incorporating in their home state.

Key Takeaways

  • Delaware corporations and LLCs must pay an annual franchise tax to remain in good standing, regardless of whether they earned income.
  • You can calculate what you owe using either the authorized shares method or the gross receipts method, whichever results in a lower tax.
  • The minimum franchise tax is $175 per year for most entities, and the maximum is $250,000.
  • Failure to pay the franchise tax by the important date results in penalties, loss of good standing, and potential dissolution of your business.
  • The Delaware Division of Corporations processes franchise tax payments and maintains records of all registered entities.

The two ways to calculate what you owe

Delaware gives you a choice between two calculation methods. The authorized shares method bases your tax on the number of shares your corporation is authorized to issue. The gross receipts method bases your tax on the total revenue your business brought in during the year. You calculate both, then pay whichever amount is lower.

Under the authorized shares method, you multiply the number of authorized shares by a rate that varies based on how many shares you have. For example, if you authorize 10,000 shares, your tax might be $100. If you authorize 1 million shares, it could be several thousand dollars. Most small corporations authorize a modest number of shares specifically to keep this calculation low.

Under the gross receipts method, you take your total revenue for the year and explore a tax rate of roughly 0.1 percent (the exact rate varies slightly by year). A business with $1 million in revenue would owe approximately $1,000 under this method. A business with $10 million in revenue would owe roughly $10,000. You report your gross receipts on your franchise tax return, and the state calculates the tax owed.

Most small Delaware corporations pay less under the authorized shares method because they authorize a small number of shares. Larger companies or those with high revenue may find the gross receipts method cheaper. The state provides a tax calculator on the Delaware Division of Corporations website to help you estimate both amounts before you file.

Minimum and maximum amounts you will owe

Delaware sets a minimum franchise tax of $175 per year for most business entities. This means that even if your authorized shares calculation comes out to $50, or your gross receipts calculation comes out to $25, you still owe at least $175. This minimum applies to corporations, LLCs, limited partnerships, and most other entity types.

Delaware also sets a maximum franchise tax of $250,000 per year. Once your calculation reaches $250,000, you do not owe any additional tax no matter how large your business grows. This cap protects very large corporations from unlimited tax liability.

The minimum and maximum amounts have remained stable for many years, but you should confirm the current amounts on the Delaware Division of Corporations website when you file, as the state legislature can change these figures.

When and how to pay the franchise tax

Delaware franchise taxes are due on March 1 each year. This is a fixed important date that applies to all entities, regardless of when your business was formed or when your fiscal year ends. If March 1 falls on a weekend or holiday, the important date moves to the next business day.

You can pay online through the Delaware Division of Corporations website using a credit card or electronic check. You can also mail a check with your franchise tax return form to the Division of Corporations office in Dover. Online payment is faster and gives you when ready confirmation of receipt. If you mail a check, allow at least two weeks for processing.

Many business owners use a registered agent or a business formation service to handle franchise tax filing on their behalf. These services charge a fee but may support the payment is made on time and the correct forms are filed. If you use a registered agent, confirm with them that they will handle the franchise tax — it is not automatic.

What happens if you miss the important date or do not pay

If you do not pay the franchise tax by March 1, Delaware assesses a penalty. The penalty amount depends on how late the payment is. A payment made in March incurs a smaller penalty than one made in June. If you do not pay within a certain timeframe, the state can dissolve your corporation or revoke your LLC's authorization to do business in Delaware.

Once your entity loses good standing, you cannot legally conduct business in Delaware, sign contracts, or sue in Delaware courts. Customers and business partners may refuse to work with you if your business is not in good standing. Reinstating a dissolved entity requires filing additional paperwork and paying reinstatement fees on top of the original tax owed.

If your business operates in multiple states, losing good standing in Delaware can trigger problems in other states as well. Many states require that a Delaware corporation remain in good standing in Delaware to maintain its authority to do business elsewhere. Check with your accountant or business attorney if you are unsure whether this applies to your situation.

Franchise tax versus income tax and other state taxes

The Delaware franchise tax is separate from federal income tax and separate from Delaware income tax (if your business is structured as a partnership or S corporation that passes income to owners). You may owe all three. A Delaware C corporation pays franchise tax to Delaware and federal income tax to the IRS, but does not pay Delaware income tax on corporate profits because Delaware does not tax corporate income.

If you are a Delaware LLC taxed as a partnership or S corporation, you pay the Delaware franchise tax, but the business itself does not pay Delaware income tax — instead, you and your co-owners pay Delaware income tax on your share of the profits on your personal tax returns. If you are a Delaware LLC taxed as a C corporation, you pay both the franchise tax and Delaware corporate income tax.

Delaware also charges an annual report fee separate from the franchise tax. This fee is typically $25 and is due at the same time as the franchise tax. Some registered agents bundle both fees together, so confirm what you are paying for.

Who must file and pay the franchise tax

Any business entity incorporated or formed in Delaware must pay the franchise tax, even if the business does not operate in Delaware and has no Delaware employees or customers. This includes Delaware corporations, Delaware LLCs, Delaware limited partnerships, Delaware general partnerships, Delaware statutory trusts, and Delaware business trusts.

If you incorporated in another state but later converted your business to a Delaware corporation, you must pay the Delaware franchise tax starting the year after the conversion. If you dissolved your Delaware corporation, you do not owe franchise tax for years after the dissolution, but you must file a final return showing the dissolution date.

If you formed a Delaware LLC but have never actually used it and it has been inactive for years, you still technically owe the franchise tax unless you formally dissolved it. Many business owners discover years later that they owe back taxes on inactive entities. If this is your situation, you can dissolve the entity retroactively and may be able to negotiate a reduced penalty with the state.

Frequently Asked Questions

Can I deduct the Delaware franchise tax on my federal income tax return?

Yes, the Delaware franchise tax is deductible as a business expense on your federal income tax return. You report it on Schedule C (for sole proprietors), Schedule E (for partnerships and S corporations), or on your corporate return depending on your business structure. Keep your franchise tax payment receipt and the state's confirmation of payment for your records.

What if my business is formed in Delaware but I live and operate in another state?

You still owe the Delaware franchise tax every year. You also likely owe income tax and possibly a franchise tax or business tax in the state where you actually operate. Delaware does not care where you do business — only that you are incorporated there. Consult a tax professional in your home state to understand your total tax obligations.

Do I have to incorporate in Delaware, or can I incorporate in my home state instead?

You can incorporate in any state you choose. Delaware is popular because it has well-established corporate law, business-friendly courts, and no corporate income tax. However, if you are a small business operating only in your home state, incorporating there is often simpler and cheaper because you avoid the Delaware franchise tax and the need to register as a foreign corporation in your home state.

What is the difference between the franchise tax and the annual report fee?

The franchise tax is the main annual fee Delaware charges to keep your business authorized. The annual report fee is a separate, smaller fee (typically $25) that covers the cost of maintaining your business record in the state's database. Both are due on March 1, and both must be paid to remain in good standing.

Can I pay the franchise tax late and just pay a penalty instead?

You can pay late, but you will owe both the original tax and a penalty. The longer you wait, the larger the penalty becomes. If you wait long enough, the state will dissolve your entity, and you will then owe reinstatement fees on top of everything else. It is always cheaper to pay on time than to pay late.