Delaware Franchise Tax Basics

The Delaware Franchise Tax is an annual fee that Delaware charges to corporations and limited liability companies (LLCs) for the right to do business in the state. It is not a tax on income or profit — it is a registration and licensing fee. Every corporation incorporated in Delaware, and every LLC formed in Delaware, must pay it each year, whether or not the business makes money or operates actively.

The amount you owe depends on the structure of your business. For corporations, the tax is based on the number of shares authorized (the shares the company is allowed to issue), not the shares actually issued. For LLCs, the tax is based on gross revenue. The state collects this tax through the Delaware Division of Corporations, and payment is due by March 1 each year for the prior calendar year.

Key Takeaways

  • Delaware charges an annual franchise tax to every corporation and LLC formed in the state, regardless of whether the business is active or profitable.
  • For corporations, the tax amount depends on authorized shares; for LLCs, it depends on gross revenue reported to the state.
  • Payment is due by March 1 each year, and failure to pay results in forfeiture of the right to do business in Delaware.
  • The minimum tax is $175 for corporations and $250 for LLCs, even if the business has no revenue or minimal authorized shares.
  • Many businesses incorporate in Delaware for legal reasons unrelated to the franchise tax, and the tax is a separate ongoing cost of maintaining that incorporation.

How the Tax Amount Is Calculated for Corporations

For a Delaware corporation, the franchise tax is calculated using an authorized shares method. You report the total number of shares your corporation is authorized to issue in its certificate of incorporation. The state then applies a tax rate based on that number.

The rates are tiered. As of the most recent published rates, corporations with 3,000 or fewer authorized shares pay $175 (the minimum). Corporations with more shares pay a higher rate per share, up to a maximum tax of $250,000. A corporation with 1 million authorized shares, for example, would pay significantly more than one with 10,000 authorized shares. You can find the current rate table on the Delaware Division of Corporations website, because the rates are adjusted periodically by the state legislature.

The key point: you control this number when you incorporate. If you authorize 1 million shares but issue only 100, you still pay tax on the 1 million. Many small businesses authorize fewer shares to keep the tax lower.

How the Tax Amount Is Calculated for LLCs

Delaware LLCs pay franchise tax based on gross revenue, not on the number of members or the amount of capital contributed. Gross revenue means total income before expenses. The state uses tax brackets, and the amount owed increases as revenue increases.

Like corporations, LLCs have a minimum tax of $250 per year. An LLC with no revenue still owes $250. An LLC with revenue between $0 and $25,000 pays $250. As revenue climbs into higher brackets, the tax increases. The maximum tax for an LLC is $12,000 per year. You report your gross revenue on your annual franchise tax report, which you file with the Division of Corporations.

When and How to Pay

The franchise tax is due by March 1 each year. The tax covers the prior calendar year (January 1 through December 31). For example, your 2024 tax, due March 1, 2025, covers your 2024 revenue or authorized shares as of December 31, 2024.

You can pay online through the Delaware Division of Corporations website, by mail, or in person. The Division accepts credit cards, checks, and electronic transfers. If you miss the March 1 deadline, the state assesses a penalty and may revoke your right to do business in Delaware. Revocation means your corporation or LLC is no longer legally authorized to operate in the state, though you can reinstate it by paying the overdue tax plus penalties and a reinstatement fee.

Who Must Pay and Who Does Not

Every corporation incorporated in Delaware must pay, with no exceptions. Every LLC formed in Delaware must pay. This includes businesses that do not operate, do not earn revenue, or are dormant. If your business is incorporated or formed in Delaware, you owe the tax.

Businesses incorporated in other states do not owe Delaware franchise tax, even if they do business in Delaware. A corporation incorporated in New York that operates a store in Delaware pays New York's corporate tax, not Delaware's franchise tax. However, that New York corporation may need to register with Delaware as a foreign corporation and pay a separate registration fee if it maintains a physical presence or conducts substantial business in the state.

Why Businesses Incorporate in Delaware Despite the Tax

Delaware incorporation is common for reasons unrelated to the franchise tax. Delaware corporate law is well-established and predictable, which matters if the business might face shareholder disputes or complex governance issues. The Delaware Court of Chancery, which handles business disputes, has decades of case law that investors and lawyers understand. Delaware also allows corporations to have flexible bylaws and does not require the business to be located in Delaware.

For many small businesses, the franchise tax is simply a cost of maintaining Delaware incorporation. A startup with 5,000 authorized shares pays $175 per year. A larger company might pay more, but the legal and structural benefits are often considered worth the expense. The decision to incorporate in Delaware is separate from the decision to pay the franchise tax — if you incorporate there, the tax is mandatory.

Frequently Asked Questions

What happens if I do not pay the franchise tax by March 1?

The state charges a penalty and your corporation or LLC loses the right to do business in Delaware. You can reinstate by paying the overdue tax, the penalty, and a reinstatement fee. Reinstatement can take several weeks. If you are doing business in Delaware without reinstatement, you may face legal liability.

Can I reduce the franchise tax by reducing my authorized shares?

Yes. You can amend your certificate of incorporation to lower the number of authorized shares, which will lower your tax the following year. The amendment must be filed with the Division of Corporations and costs a filing fee. This strategy works only if you do not need the higher number of shares for future stock issuance or employee stock plans.

Do I owe Delaware franchise tax if my business is inactive?

Yes. An inactive corporation or LLC still owes the annual franchise tax. If you want to stop paying, you must formally dissolve the business by filing a certificate of dissolution with the Division of Corporations. Dissolution is permanent and cannot be easily reversed.

Is the franchise tax deductible on my federal income tax return?

Yes, generally. The franchise tax is a business expense and may be deductible as a state tax or business license fee on your federal return. Consult a tax professional about your specific situation, because deductibility depends on how your business is structured and taxed.

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

They are separate. The franchise tax is the annual fee for the right to do business. The annual report is a filing that updates your business information with the state and costs an additional fee (currently $25 for corporations and $100 for LLCs). Both are due by March 1.