Delaware Franchise Tax | Why Your Bill Says $85,000 and How to Fix It

It is late January. A Delaware franchise tax notice arrives, addressed to your registered agent, who forwards it on. Your US subsidiary, the one with four employees and a modest balance sheet, owes $85,165 by 1 March.

Nobody at head office can work out what has happened. The entity barely trades. There must be an error somewhere.

There is no error, and there is also very little to pay. Both of those things are true at once, and the gap between them is one of the more expensive misunderstandings we deal with at Foothold America.

Why is my Delaware franchise tax bill so high?

Because Delaware defaults to the calculation method that ignores your finances completely. There are two methods, and the state bills you using the one it can work out from public record alone.

The Authorized Shares Method looks only at how many shares your certificate of incorporation authorizes. Not how many you issued, not what the company is worth, not whether it trades at all.

That schedule is gentle at the bottom and punishing above it. Run it forward and you can see how quickly it climbs.

Ten million authorized shares is not an exotic number. It is close to standard for any company that set up with an option pool and room to issue later. The moment you authorized those shares at incorporation, you set your default Delaware bill, whether or not you ever issued a single one.

The tax caps at $200,000, rising to $250,000 for large corporate filers.

How do I reduce my Delaware franchise tax?

Recalculate under the Assumed Par Value Capital Method, which takes account of your actual gross assets and issued shares. The minimum under this method is $400.

The calculation runs in three steps:

1. Assumed par value per share = total gross assets ÷ total issued shares
2. Assumed par value capital = assumed par value per share × total authorized shares
3. Tax = assumed par value capital ÷ $1,000,000, multiplied by $400

Apply that to a typical early-stage profile of 10,000,000 authorized shares, 2,000,000 issued and $1,000,000 in gross assets, and the result is roughly $2,000 against the $85,165 printed on the notice.

Two practical points matter more than the arithmetic.

Delaware will not do this for you. The state issues the notice on the authorized shares figure and leaves it there. You have to select the alternative method yourself, and enter your gross assets and issued shares, when you file the annual report through Delaware’s portal. Pay what the notice says and you have overpaid. Delaware keeps it.

Your gross assets come from US Form 1120, Schedule L. That means your US tax position needs to be prepared, or at least reliably estimated, before you can file correctly. In practice this is exactly why companies pay the wrong number. The notice lands in January, the 1120 is not ready, and somebody approves the invoice to make the problem go away.

Get Started → Received a Delaware notice you do not recognize? Talk to our team before you pay it.

 

What does your Delaware entity owe, and when?

It depends on what kind of entity you have, and the dates are not the same for each.

Two things trip up international companies here.

The first is that LLCs pay a flat $400 and file no annual report at all. The franchise tax panic is a corporation problem. If you formed an LLC, your whole Delaware obligation is $400 by 1 June, which is easy to miss precisely because no report arrives to remind you.

The second is that Delaware wants the money quarterly once you owe $5,000 or more. The schedule runs 40% by 1 June, 20% by 1 September, 20% by 1 December, and the balance by 1 March. Companies that recalculate down to a few hundred dollars never encounter this. Companies that pay the authorized shares figure sometimes find themselves on an instalment plan for a tax they never owed in the first place.

What happens if you miss the deadline?

The penalties themselves are modest. What follows them is not.

Delaware charges a $200 late penalty for domestic corporations and LLCs, $125 for foreign corporations, plus 1.5% interest per month on whatever is unpaid. That works out at roughly 19.6% a year, which is unpleasant but survivable.

The harder consequence is that you cannot obtain a Certificate of Good Standing. Delaware will not issue one while you are behind. That certificate is what a bank asks for when you open a US account, what an investor’s counsel asks for in diligence, what an acquirer asks for, and what other states require before they will let you qualify to do business there. A lapsed Delaware filing quietly blocks your expansion into every other state, and most companies do not discover this until somebody requests the certificate.

Then there is the charter itself. A corporation that fails to pay or file for more than one year has its charter voided. The entity does not disappear, but it loses the right to operate.

At that point the exposure changes character entirely. Once an entity is administratively dissolved or voided, the liability shield goes with it. Directors and officers who carry on trading through that period can be held personally liable for obligations incurred while the company was dissolved. Banks freeze accounts when they discover the status. Contracts signed during the lapse may turn out to be unenforceable. In some states the company name becomes available for anyone else to take.

That is how a forgotten $250 filing becomes a personal liability question for your board.

What else does your US entity owe every year?

Delaware is one line on a longer list, and the list grows with every state you employ in.

• A registered agent in every state where you are formed or qualified, kept current. Agents resign when their invoices go unpaid, and a state with no way to serve you can dissolve you on that basis alone.
• An annual or biennial report in every state where you have qualified, each with its own deadline, fee and format.
• State franchise or privilege taxes, which several states levy separately from income tax. California’s $800 minimum applies to any corporation incorporated, registered, or doing business there. Our comparison of Delaware against other states sets out how these stack up.
• A current principal office address on file, so official correspondence reaches somebody who actually reads it.

The point worth absorbing is that every state you qualify in adds a permanent annual obligation rather than a one-off filing. Six states means six agents, six deadlines and six fees, indefinitely, until you formally withdraw.

Why does this catch international companies?

Three structural reasons, none of which amount to carelessness.

The notice goes to your registered agent rather than to you. Your agent is a service provider in Delaware. They forward the notice, usually by email, often to whoever signed up two years ago and has since left the company. Nothing lands at head office with a recognizable government logo on it.

Nobody owns the calendar. In most European structures, annual filings sit with the company secretary or the accountant by default. A US subsidiary set up by a law firm at incorporation frequently has no one holding that role afterwards. The entity gets created and then orphaned.

And the bill looks like a mistake, so it gets escalated rather than actioned. An $85,000 demand against a four-person subsidiary does not read as routine compliance. It reads as an error, so it goes to legal, or to the parent’s finance team, or into a queue while everyone waits for somebody to explain it. Meanwhile 1 March passes.

We are regularly asked to help companies that have been void in Delaware for two or three years, cannot open a bank account or close a funding round, and had no idea until somebody requested the certificate.

Your annual US entity maintenance calendar

This sits alongside the wider US business calendar of federal and state deadlines.

How Foothold America keeps your US entity in good standing

We work exclusively with companies headquartered outside the United States, so orphaned US entities are something we see constantly rather than occasionally.

Our Entity Setup and Management service covers formation and the years that follow: registered agent, annual reports in every state where you are qualified, franchise tax calculated under the method that actually applies to you, and a calendar that somebody owns. If your entity has already lapsed, we will tell you what reinstatement involves and what it costs before you commit to anything.

Where keeping an entity in a given state is not worth the recurring obligation, our Employer of Record service lets you employ there without registering at all. PEO+ centralizes multi-state administration for companies that want to keep direct employment.

Get Started → Talk to our team about an entity health check across every state where you are registered.

Further reading

• Year-End US Compliance Checklist