Delaware franchise tax
The Delaware franchise tax is an annual levy imposed by the State of Delaware on corporations chartered within its borders, representing one of the primary sources of revenue that the state collects from its large registered corporate population. Unlike income taxes, which are calculated based on a company's profits, the Delaware franchise tax is assessed simply for the privilege of being incorporated in Delaware — meaning that even corporations that conduct no business within the state, earn no revenue in Delaware, and maintain no physical presence there are still required to pay the tax and file an annual report. This structure makes the franchise tax a distinctive feature of Delaware's corporate legal environment and a significant component of the state's fiscal framework.
Delaware's attractiveness as a jurisdiction for incorporation has long made the franchise tax a reliable revenue source. Because hundreds of thousands of corporations — ranging from small startups to major publicly traded companies — choose Delaware as their legal home, the aggregate annual collections from franchise taxes and associated annual report fees constitute a substantial share of the state's budget. The tax is administered jointly by the Delaware Division of Corporations and the Delaware Division of Revenue, each of which plays a defined role in collection, compliance, and enforcement.
Overview and Purpose
The Delaware franchise tax applies to domestic corporations — those formally incorporated under Delaware law — and is separate from any taxes that might apply to foreign corporations registered to do business in Delaware. The tax is not based on corporate income, net worth derived from operations, or the volume of business conducted. Instead, it is calculated using methods that relate to the corporation's authorized capital structure, a feature that keeps the tax applicable regardless of whether the company is profitable.
The annual franchise tax obligation exists alongside a requirement to file an annual report. Both the tax payment and the annual report are due no later than March 1st of each year.[1] Failure to meet this deadline can result in penalties, interest, and, ultimately, the loss of the corporation's good standing in Delaware — a consequence that carries significant practical implications for companies that rely on their Delaware charter for financing, contracting, or other business purposes.
The dual administrative structure means that the Division of Corporations, which sits within the Delaware Department of State, handles the annual report component and the chartering of entities, while the Division of Revenue within the Delaware Department of Finance manages the tax collection side of the obligation. Corporations must satisfy both requirements to maintain their standing.
Calculation Methods
among the most important aspects of the Delaware franchise tax for corporations and their advisors is that there are two distinct methods available for calculating the amount owed. The state permits corporations to use whichever method results in a lower tax liability, giving companies an incentive to understand both approaches and select the more favorable one.
The Authorized Shares Method is the simpler of the two calculation approaches and is often the default method applied when a corporation first encounters its franchise tax obligation. Under this method, the tax is calculated based on the total number of shares the corporation is authorized to issue, as stated in its certificate of incorporation. The more shares authorized, the higher the tax — up to applicable caps.
The minimum tax under the Authorized Shares Method is currently $175.00.[2] This minimum applies to corporations with a relatively small number of authorized shares. As authorized shares increase into higher tiers, the tax amount rises accordingly. For corporations that have authorized a very large number of shares — a common practice among venture-backed startups and technology companies that anticipate significant equity issuance — the Authorized Shares Method can produce a very high tax bill, sometimes reaching into the tens of thousands of dollars or more.
This is why many sophisticated corporations and their legal counsel opt to calculate the tax under the alternative method before accepting the figure generated by the Authorized Shares approach.
Assumed Par Value Capital Method
The Assumed Par Value Capital Method is a more complex calculation that takes into account the corporation's total gross assets and issued shares, in addition to the authorized share structure. By relating the tax base to actual economic activity — specifically, the ratio of issued shares to total assets — this method frequently produces a significantly lower tax liability for corporations that have authorized a large number of shares but have relatively modest assets.
The minimum tax under the Assumed Par Value Capital Method is also $175.00.[3] For many early-stage companies with high authorized share counts but limited balance sheet assets, the Assumed Par Value Capital Method can reduce a franchise tax bill that might otherwise be calculated in the thousands of dollars under the Authorized Shares Method down to the minimum amount or a figure close to it.
The availability of two calculation methods reflects Delaware's effort to balance revenue generation with maintaining the state's competitive position as a preferred incorporation jurisdiction. By allowing corporations to choose the more favorable result, Delaware reduces the risk that its franchise tax structure would drive companies to reincorporate in other states with lower or no franchise tax obligations.
Annual Report Requirements
In addition to paying the franchise tax, domestic corporations incorporated in Delaware are required to file an annual report each year. Delaware has mandated electronic filing for domestic corporations' annual reports, meaning that paper submissions are no longer accepted for this category of filer.[4] The annual report captures basic information about the corporation, including details about its officers and directors, its registered agent in Delaware, and the address of its principal place of business.
The annual report and tax payment are due together by March 1st of each year.[5] This unified deadline means that corporations cannot simply pay the tax without filing the report, or vice versa, without falling into non-compliance. Both obligations must be satisfied concurrently.
The electronic filing mandate reflects a broader modernization effort within Delaware's corporate administration infrastructure. Online submission streamlines processing, reduces errors associated with paper handling, and allows the Division of Corporations to maintain more current records on the large volume of entities registered in the state.
Good Standing and Entity Status
Maintaining good standing in Delaware is a practical necessity for most corporations. Lenders, investors, counterparties to significant contracts, and acquirers in mergers and acquisitions transactions routinely require evidence that a corporation is in good standing in its state of incorporation. A lapse in good standing — which can result from failure to file the annual report, failure to pay the franchise tax, or both — can create significant complications for corporate transactions and operations.
Delaware provides an online tool through which interested parties can check the status of any registered entity. There are two tiers of online status inquiry available: a basic status check for a fee of $10.00, and a more detailed status inquiry that includes tax and history information for a fee of $20.00.[6]
The ability to check entity status online serves multiple constituencies. Corporate attorneys conducting due diligence in transactions use the tool to verify that an acquired entity or counterparty is properly current with its Delaware obligations. Registered agents use it to monitor the status of entities they serve. Officers and directors of corporations can use it to confirm that their company's standing has not inadvertently lapsed due to an administrative oversight.
The two-tiered fee structure reflects the difference in the depth of information provided. The basic $10.00 status check confirms whether the entity is currently in good standing, while the $20.00 option provides historical information about the entity's tax payments and filing history — data that can be particularly useful in transaction due diligence or in resolving compliance questions about past periods.
Administration and Compliance
The administrative framework for the Delaware franchise tax involves coordination between multiple state agencies. The Division of Corporations is the primary point of contact for most corporations dealing with annual report filings, entity status inquiries, and the chartering process itself. The Division of Revenue handles the tax collection function and maintains records of franchise tax payments.
Electronic filing has simplified the compliance process for most corporations, allowing them — or their registered agents and attorneys acting on their behalf — to complete the annual report and remit the franchise tax payment through an online portal. This system allows for same-day processing in most cases, which is particularly valuable for corporations that need to quickly cure a lapse in good standing.
Registered agents in Delaware — firms and individuals that maintain a registered address in the state on behalf of corporations that are incorporated there — play a central role in the franchise tax compliance ecosystem. Most corporations incorporated in Delaware use a professional registered agent rather than maintaining their own registered office in the state, and many of these agents offer franchise tax filing services as part of their standard service packages.
Context Within Delaware's Corporate Law Framework
The franchise tax does not exist in isolation but is one element of a broader system that makes Delaware an attractive jurisdiction for incorporation. Delaware's General Corporation Law, administered through the Court of Chancery, provides a well-developed body of corporate law that offers predictability and flexibility. The franchise tax is, in effect, one of the costs corporations pay for access to this legal framework.
For many corporations — particularly those that are small, early-stage, or not yet generating significant revenue — the minimum franchise tax of $175.00 represents a manageable annual cost of maintaining a Delaware charter. For larger corporations with complex capital structures, the ability to choose between the two calculation methods ensures that the tax remains calibrated to the corporation's actual situation rather than producing an arbitrary result based solely on the number of authorized shares.
The combination of a well-regarded legal system, predictable administrative processes, electronic filing infrastructure, and a structured approach to franchise tax calculation reflects the framework Delaware has developed to support its position as the leading state for corporate incorporation in the United States.