Non-Payment of Delaware Franchise Tax and the Consequences

Non-Payment of Delaware Franchise Tax and the Consequences

Franchise Tax;

is a fixed fee for companies to pay to maintain their businesses in Delaware, in a sense the cost of having a business in Delaware. It is essentially a form of state tax imposed by the state of Delaware for the right to own a company in Delaware. This tax is not calculated based on any income or company activity. It is not dependent on and calculated based on the activities or the income of the business, it is -as mentioned, a fixed amount to keep the business operating. Therefore, it is more of a fee rather than a tax which is required by the state of Delaware to maintain the good standing status of the company.

In this connection, companies that are incorporated in Delaware, regardless of where the company conducts business, must file an Annual Franchise Tax Report (only corporations) and pay Franchise Tax for incorporating in Delaware. Companies incorporated in Delaware but not conducting business in Delaware are not subject to corporate income tax but do have to pay Franchise Tax.

In case of non-compliance,

Delaware Division of Corporations will invalidate or cancel your company unless you pay your Delaware Franchise Tax and keep a Registered Agent actively. Additionally, if you miss a Franchise Tax payment for your Delaware Corporation, LP or LLC, or you do not file the Delaware Corporation Annual Report, it will always be in the records of the Delaware Division of Corporations. So, if someone investigates the company, a missed Franchise Tax payment exists in the company’s history. This may not be attractive to potential investors.

Furthermore, if you do not pay your Delaware Franchise Tax for three consecutive years for LLC/ LP (for two consecutive years for Delaware Corporations), the State of Delaware will put in a Cancelled/Voided status.

In conclusion, if you fail to pay a franchise tax and/or file a tax report, then your company will no longer be in good standing, thereby affecting your business in the long term.