Taxation
States tax entities differently. Different taxes, different forms, different due dates. It can be administratively overwhelming. One must keep this in mind when considering organizing outside of the state where a client will be doing business – or has its physical location. If your client is in Pennsylvania, it will file forms within the commonwealth (note the use of the word “commonwealth” and not “state”) and if it organizes elsewhere, it will file forms there as well. Is it worth doing double the work and keeping track of so many more things?
Some states impose a Capital Stock/Franchise Tax. This tax is typically an annual tax and can be either a flat rate or change based on the size of the company. Also, it is typical that an annual report accompanies the tax. This is not the income tax. Income tax is separate. In Delaware, entities that are not located in Delaware but are organized there, do not have to pay income tax – one of the benefits of organizing in Delaware. However, such entities are subject to a Franchise Tax and must file an annual report. Which entities are required to remit this tax? See below.
All corporations incorporated in the State of Delaware are required to file an Annual Report and to pay a franchise tax. Exempt domestic corporations do not pay a tax but must file an Annual Report. The Annual Report filing fee for all other domestic corporations is $50.00 plus taxes due upon filing of the Annual Report. Taxes and Annual Reports are to be received no later than March 1st of each year. The minimum tax is $175.00 for corporations using the Authorized Shares method and a minimum tax of $400.00 for corporations using the Assumed Par Value Capital Method. All corporations using either method will have a maximum tax of $200.000.00 unless it has been identified as a Large Corporate Filer, then their tax will be $250,000.00. Taxpayers owing $5,000.00 or more pay estimated taxes in quarterly installments with 40% due June 1, 20% due by September 1, 20% due by December 1, and the remainder due March 1. The penalty for not filing a completed Annual Report on or before March 1st is $200.00 Interest at 1.5% per month is applied to any unpaid tax balance.
Although Limited Partnerships, Limited Liability Companies and General Partnerships formed in the State of Delaware do not file an Annual Report, they are required to pay an annual tax of $300.00. Taxes for these entities are due on or before June 1st of each year. Penalty for non-payment or late payment is $200.00. Interest accrues on the tax and penalty at the rate of 1.5% per month.
In Pennsylvania, we used to have a Capital Stock/Franchise Tax that accompanied a ridiculously lengthy form. While the name of this tax would seem to indicate that it was only for corporations, that was not the case – it applied to LLCs as well. The typical LLC would complete the laborious form only to determine it owed $0. If you detect any pejorative tone, there’s a reason for that, and the P