Missing deadlines (that may cost you $25,000)

Missing deadlines (that may cost you $25,000)

This is the fifteenth (and final… for now) post of Mistakes Founders Make, a series of blog posts that shine light on legal mistakes that startups commonly make and attorneys have to fix.  Keep in mind that the post sacrifices detail for simplicity and is for informational purposes only.  It should not be taken as advice — whether legal, tax, or other — and does not create an attorney-client relationship.

Just the basics

Quite simply, you miss a deadline.

Some are fairly inconsequential.  Others can cost you a $25,000 penalty.

Follow a compliance calendar for Delaware startups.  Set a reminder, and submit well before the deadline.  We list a few common deadlines here.

What deadlines do you mean?

One that applies to all Delaware corporations is the Delaware Annual Franchise Tax Report, which is due every year on March 1 and can be filed here. The deadline is a hard one and there’s an automatic $200 penalty for missing it, along with 1.5% interest accruing monthly.

 

Miss this deadline twice in a row, and you’ll have your “charter voided.” While this is not as scary as it sounds, it does mean that you’ll have to file a “Certificate for Revival of Charter,” which is going to be an extra hassle for your (or your attorney’s) already hassle-full life.

While we're on this topic, what's with that insanely high Franchise Tax amount I see when I log in?

Don’t panic. The franchise tax figure you see upon logging in is based on the number of authorized stock your corporation has. As a startup, chances are your authorized common stock is 10,000,000 (or maybe more), hence that super-high figure.

 
Instead, enter the number of issued stock your company has had as of the last day of the reporting year, enter the gross assets amount right next to it, and select the last day of the reporting year in the last field — then click recalculate.
 
The page will load and…
 
Just like that, your Franchise Tax figure will be reduced to a few hundred dollars (don’t worry, this is entirely legally). To be exact, it’ll likely be $400 plus the $50 filing fee, assuming you’re just starting off.
 
If you’re really interested in how this works, check out this official webpage.

What else? Federal taxes?

Yes, another important one is your federal tax return, which will likely include the Form 1120 Form. The deadline this year is April 18, 2023.

 

But here’s a little-known fact: if 25% or more of your corporation is owned by a foreign stockholder, you may need to file the Form 5472. Miss this filing, and you’ll face a penalty of $25,000. Yes, this is painful, so make sure you talk with your tax professional on this.

And if I'm qualified as a foreign corporation in another state?

That’s another important one. California is a common example. After you quality in California, you should file a Statement of Information within 90 days — and repeat that every year with the deadline being the last day of the month in which you qualified. California used to be stricter if you missed the deadline, but it seems more laid back presently.  Still, stay on top of things and make sure you file on time.

 

New York is another common one, which requires a corporate filing once every two years. If you’re qualified in another state, make sure you check its corporate filing requirements as well.

Stepan Khzrtian is a corporate attorney with over 10 years of experience helping startups with their legal needs, including corporate formation, financing rounds, equity issuances, personnel matters, contracts, acquisitions, and intellectual property. His clients have ranged from pre-seed to pre-IPO companies. He is the co-founder and CEO of Corpora, Inc.

Stepan Khzrtian

Stepan Khzrtian

Stepan Khzrtian is a corporate attorney with over 10 years of experience helping startups with their legal needs, including corporate formation, financing rounds, equity issuances, personnel matters, contracts, acquisitions, and intellectual property. His clients have ranged from pre-seed to pre-IPO companies. He is the co-founder and CEO of Corpora, Inc.

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