Does my startup have to pay full franchise taxes, even if it was incorporated at the end of the year?

For more help with tax and compliance matters, see How can my corporation get help complying with Delaware’s requirements?

Yes, companies owe the full Delaware franchise tax each year they are in existence, even if they only existed for a small part of the year. For example, if you incorporate a company on December 31 of a given year, that company will still owe the full Delaware franchise tax for that year.

The same is generally true for California franchise tax. However, newly qualified C corporations are exempted from paying California’s minimum franchise tax during their first taxable year, pursuant to Section 23153(f)(1) of the California Revenue and Taxation Code. Corporations that qualify for this exemption still have to pay franchise tax based on their California income. Note that if your company starts doing business in California, it is subject to taxation in California regardless of whether it has qualified to do business in California.

Franchise taxes are just one factor to consider when your startup is deciding when to incorporate. For example, if your startup has investors eager to invest or new employees to hire, it may be prudent to incorporate immediately.

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