The name “Franchise Tax” is confusing. It may sound like a tax on a McDonalds or Burger King franchise. However, this is not a tax on franchise businesses. It applies to all businesses. The logic is that this is a tax because the company is organized to do business (or “has the franchise” to do business.)
Some states, including Delaware, charge for allowing a business to organize there. Most states tax companies annually based on the assets and income of the company. Delaware does not have an income tax on companies operating outside of the state.
The Delaware Secretary of State charges its franchise tax differently from most states. The fees are flat for LLCs and corporations (as long as the corporation works within a standard capital structure.) Even if a company chooses to authorize more than the standard shares, the state offers an alternative way of calculating the tax which helps reduce the size of the tax bill. This is one of the major reasons over half of Fortune 500 companies are incorporated in Delaware.
Each state that charges franchise tax has a different due date. In Delaware the dates to remember are March 1 for corporations and June 1 for limited liability companies. Never lose sight of these dates! If you fail to meet them your company will be subject to a late fee and interest charges. Failure to pay means that a business is not in good standing with the state. This means that a if a company is sued that its owners may be held personally liable for the actions of the company.
Delaware taxes are modest and predictable, which is just another reason why so many companies register in the “corporation friendly” state.
It is still important, for both financial and legal reasons, to make sure the tax is submitted and the Annual Report filed. Your Registered Agent should be able to assist you with this. A company like Inc. Plan (USA) has years of expertise in paying taxes in a timely way, filing Annual Reports and helping to keep your business in compliance and good standing.