Staying Ahead of the Curve: Navigating Annual Reports for Delaware Corporations

Every year, founders of Delaware corporations should remember to comply with annual reporting requirements in their home state.

The Annual Franchise Tax Report and the “Annual Report”

All Delaware corporations are required to file an annual report with the Delaware Division of Corporations[1] and pay its franchise tax levied for the privilege of being a Delaware corporation. This report is due by March 1st of each year. It is filed electronically and is used to update the State on your corporation’s status.

Many of the emerging companies incorporated in Delaware are taken aback by the staggering franchise tax bill they receive in the mail, usually delivered to their registered agent. The franchise tax bill can reach as high as $200,000 (an amount that is arrived at by calculating the amount due using the Authorized Shares Method). We explain below that there are two ways to calculate the franchise tax that is due: (1) the Authorized Shares Method and (2) the Assumed Par Value Capital Method. These methods give vastly different tax amounts, so be sure to understand how to calculate it.[2] Although by default the company receives the tax bill with the amount due calculated using the Authorized Shares Method, it is actually free to pay the lowest tax resulting from either of the methods.?The minimum tax that a Delaware corporation may pay is $175 and the maximum tax is $200,000.?The Delaware Division of Corporations provides a helpful calculation sheet that allows the corporations to estimate their franchise tax by using both methods.?It can be found here.

The Authorized Shares Method

This method looks at the number of authorized shares.?If your corporation has authorized 5,000 shares or less, the minimum tax is $175. If your corporation has authorized between 5,001 and 10,000 shares, the tax is $250.

For each additionally authorized 10,000 shares or part of 10,000 shares, the corporation must pay an additional $85.

This method’s maximum annual tax is $200,000 (For public companies, this can ascend to $250,000).

Under this method, Calculating Delaware Franchise Tax for a corporation with 10,000,000 authorized shares (which is a typical number of shares of common stock to be authorized in the initial certificate of incorporation of a Delaware startup) is as follows:

-?????????$250 is automatic since the authorized shares exceed 10,000.

-?????????$84,915 is calculated by multiplying $85 by 99 (the total amount of additional groups of 10,000 authorized shares.

Total tax owed: $85,115 (Pretty, Pretty, Pretty Expensive)

The Assumed Par Value Capital Method

The Assumed Par Value Capital Method calculates the Delaware franchise tax by assessing all issued and outstanding shares and total gross assets. The information used in the report should be based on the corporation’s gross assets for the fiscal year ending on the calendar year of the report and should match the figures reported on the US Form 1120, Schedule L. This method calculates $400 for every million dollars or portion of a million dollars of the Assumed Par Value. To calculate the tax using the Assumed Par Value Capital Method, the corporation should divide the total gross assets by the total issued shares to get the assumed par value, then multiply the assumed par value by the number of authorized shares, divide the result by 1 million, round up any partial quotient by 1, and finally multiply the result by $400.

The minimum tax that Delaware corporation will pay using the Assumed Part Value Capital Method is $400.00. This method’s maximum annual tax is $200,000.

Under this method, Calculating Delaware Franchise Tax for a corporation with 10,000,000 Authorized Shares with a Par Value of $0.0001, of which 8,700,000 share are issued and outstanding, and gross total assets of $1,400,000 is as follows:

-?????????$1,400,000 (Gross Assets)/8,700,000 (Issued Shares) = $0.16 (Assumed Par Value)

-?????????$0.16 * 10,000,000 (Authorized Shares) = $1,600,000 (Assumed Par Value Stock)

-?????????$1,600,000 / 1,000,000 = 1.6; Round up to 2 (*round up any partial quotient by 1)

-?????????2 * $400 = $800

Total tax owed: $800 (FAR LESS THAN THE AUTHORIZED SHARES METHOD).?Since the corporations can choose to pay the lowest amount of tax resulting from either method, this corporation will choose to pay $800 based on the Assumed Part Value Capital Method.

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The Annual Report

Chapter 8 of the Delaware General Corporation Law, titled "Reports and Financial Statements,"[3] contains provisions related to annual reports. Specifically, Section 502 lays out the requirements for a corporation to file an annual report with the Delaware Secretary of State. The annual report should include the name of the corporation, its file number assigned by the Secretary of State, the address of the corporation's registered office in Delaware, and the name of its registered agent at that office. It should also include the all the names and addresses of the corporation's directors and at least one of the officers.

If a corporation fails to file the Annual Report and pay the franchise tax before the March 1st deadline, it may be subject to penalties, including a fee of $200 for the first 30 days of delinquency, and 1.5% monthly interest for any unpaid balance. Furthermore, if a corporation fails to file its annual report for two or more consecutive years, the state may take the drastic step of administratively dissolving the corporation. This means that the corporation's authority to do business will be revoked. Delaware will deny requests for certificates of good standing[4] to any corporation that does not meet the annual filing requirement, meaning it can potentially cause disruptions in your company's plans for financing or sale.

It's important to note that the annual report is not the same as the financial statement, which is a document that contains detailed information about a company's financial performance and is intended for the use of investors and other stakeholders. The annual report is a less detailed document that is primarily intended to provide the state with updated information about the company's management and contact information. This helps the state maintain an accurate and up-to-date record of all corporations formed within its borders, which is vital for maintaining a fair and orderly marketplace.

[1] 8 Del. C. § 501.

[2] Id. § 503.

[3] Id. § 502.

[4] Id. § 105.