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 PA Department of Revenue officers heard my thoughts on it several times. (We could say even annually.) Thankfully, Governor Tom Wolf’s administration removed the tax altogether. Such removal is a win for entrepreneurs in Pennsylvania not just because of the economics of the tax itself but also because of the time it took to gather the information and complete the form.
Income taxes do not play much of a role in entity selection as most of the time the tax is only levied on companies with nexxus in the state. For example, in Pennsylvania, “[d]omestic and foreign corporations are subject to the corporate net income tax for the privilege of doing business; carrying on activities; having capital or property employed or used in Pennsylvania; or owning property in Pennsylvania.” If you are curious though, the Corporate Net Income tax in PA is 9.99%.
Sales tax is not something that will affect jurisdiction very much but use tax may, and since they are similar it just makes sense to talk about them both simultaneously. When a Pennsylvania business sells an item, the business must collect sales tax from the purchaser. Usually, this tax is 6% but if the purchase occurs in Allegheny county +1% and if in Philadelphia (city) +2%. Sales tax does not impact a jurisdiction decision because the purchaser pays it, not the business/seller, but for small businesses it could impact them administratively – form filings, tax remissions, etc.
A business may make purchases outside of Pennsylvania and then use the items while operating within the commonwealth. If no sales tax was paid when the item was purchased from an out-of-state vendor, then the Pennsylvania business must remit use tax. The use tax rate is identical to the sales tax rates mentioned above.
💡Think: What is the policy behind the use tax? 📖 After you’ve thought about it, read this page on the Pennsylvania Department of Revenue’s site.
Check out this excellent resource to determine which state is currently the best based on taxes: 2021 State Business Tax Climate – Jared Walczak and Janelle Cammenga.
Corporations incorporated in Delaware but not conducting business in Delaware are not subject to corporate income tax, [30 Del.C, Section 1902(b)(6)] but do have to pay Franchise Tax administered by the Delaware Department of State.
Any corporation that is incorporated in Delaware (regardless of where you conduct business) must file an Annual Franchise Tax Report and pay Franchise Tax for the privilege of incorporating in Delaware.
Franchise Taxes and annual Reports are due no later than March 1st of each year.
An annual Franchise Tax Notification is mailed directly to the corporation’s registered agent. Blank Franchise Tax Returns are not available. The Delaware Division of Corporations will require all Annual Franchise Tax Reports and alternative entity taxes to be filed electronically.
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.