
We got our first Delaware tax bill: $74,018.74 - ccvannorman
We are Imaginary Number, a small educational games startup with 3 founders, zero employees, and a handful of paying customers. I finally opened the letter from CSC, the Delaware agent responsible for collecting taxes. Here&#x27;s what they sent:<p>https:&#x2F;&#x2F;mathbreakers.com&#x2F;static&#x2F;img&#x2F;csc_delaware_tax.jpg<p>After 10 minutes of mounting panic, I came across some information which relieved me. Apparently Delaware likes to use the maximum method for calculating taxes for startups, when we actually only owe a tiny fraction of the amount they claim we owe (and they offer a hefty interest of $525.56 on this supposed balance as well!)<p>Here&#x27;s the article, if you&#x27;re a C-Corp in Delaware and at the seed stage, you&#x27;ll need to see this.
http:&#x2F;&#x2F;capgenius.com&#x2F;2011&#x2F;03&#x2F;02&#x2F;de-franchise-tax&#x2F;<p>Any other startups here gotten a nice &quot;tax surprise&quot;? Would love to hear about it!
======
chao-
Quite the opposite. In Texas, until a certain point in revenue, they really
don't want to waste any time and resources on you. They ask "Did you make at
least $1,000,000 last year? No? Well, please move along peasant, we have _real
businesses_ to deal with who might actually be worth auditing."

Makes sense, somewhat. Even in the case of minor fraud, they would likely
spend more in manpower than they could possibly reclaim from such a low-
earning outfit. You still have to file, of course, but it's properly simple if
you didn't earn a significant amount.

 _EDIT: corrected from $200,000 to one million._

~~~
Alupis
In CA, if your gross under a certain revenue, you owe a base amount in taxes
($800 in taxes + your biz license and other fees). If you are over a certain
revenue, then you owe a percentage (which comes out to equal or greater than
the $800 + biz license and fees). [1]

This sucks a lot for small side businesses/projects, most of which may not
even make $800 in the first year. It's a very anti-small business law/tax,
which is why a lot of internet based companies incorporate out of state like
Nevada where their tax liability is significantly lower or none at all.

[1]
[https://www.ftb.ca.gov/businesses/bus_structures/LLCompany.s...](https://www.ftb.ca.gov/businesses/bus_structures/LLCompany.shtml)

~~~
basher
Sadly - if any aspect of your business is conducted in California (e.g. you
reside there) - that minimum $800++ is still owed - regardless of where it's
incorporated.

~~~
LeBlanc
It depends.

The California Corporation Code states that merely residing in the state does
not mean you are required to register as a foreign (out of state) LLC and pay
the $800. If your LLC is registered elsewhere, and your business is 100%
internet only and doesn't have any employees, property, etc in the state, then
you are probably fine. Obviously talking to a real lawyer about your specific
case is a good idea.

Keep in mind though that you WILL still have to pay California income tax on
whatever your share of the LLC's profits is.

See 17708.03 10.c here:

[http://www.leginfo.ca.gov/cgi-
bin/displaycode?section=corp&g...](http://www.leginfo.ca.gov/cgi-
bin/displaycode?section=corp&group=17001-18000&file=17708.01-17708.09)

------
awad
At previous company incorporated in New York (oh, to be young and naive) with
just 3 technical co-founders we were slapped with a ~30kish fine for not
having worker's compensation. When trying to explain the situation to the
state, that the only 3 employees were the owners who typed in front of a
computer all day but were still interested in resolving the issue, we were no
less threatened by the official on the other end that we had no leverage and
they were going to go after our personal assets. Quite a terrifying time for a
21 year old to be honest.

~~~
gyardley
Oh man - I've been there. We moved from New Jersey to New York and the
organization we hired for payroll and insurance botched the worker's
compensation for half a day - it started on the first of the month and we
moved into our office on the afternoon of the 31st, the day before. Bam,
$11,000 fine.

That took months to sort out, the officials I spoke to treated me like some
sort of Snidely Whiplash cartoon villain, and we still ended up having to pay
the folks up in Albany $1,000. Such a hassle over nothing.

~~~
rayiner
It's frustrating to be treated like a Snidely Whiplash cartoon villain over a
mistake. But it's hard to distinguish willfully bad actions from mistakes, and
the fact is that most people engage in at least some degree of willfully bad
behavior: [http://economix.blogs.nytimes.com/2009/02/03/how-common-
is-t...](http://economix.blogs.nytimes.com/2009/02/03/how-common-is-tax-
evasion/?_php=true&_type=blogs&_r=0) ("Various estimates put the tax cheat
rate at 80 to 95 percent of people who employ baby sitters, housekeepers and
home health aides.") Enforcement keeps people civilized, and when enforcement
is lax, the culture decays and civilization crumbles (see, e.g., Greece;
almost any third-world country).

~~~
gyardley
I agree - it's hard to distinguish _some_ willfully bad actions from mistakes.
I don't think missing a single day's worth of worker's comp insurance in the
middle of a state-to-state office move qualifies as one of those hard-to-
distinguish-from-willfully-bad-actions, though.

------
miiiiiike
It's a good idea to run your numbers through the Franchise Tax Calculator:
[http://corp.delaware.gov/taxcalc.shtml](http://corp.delaware.gov/taxcalc.shtml)
Mine was $180k on the statement, ~$1.7k in reality.

Still, even though I knew exactly how much I owed, when I saw $180k on the
statement my first call was to my lawyer, for a hug.

~~~
ph0rque
How much did your lawyer's hug cost you?

~~~
ccvannorman
Hugs to our lawyers at Perkins Coie are always "free" (they said a bunch of
numbers, muttered something about future payments, and it ended with free ..
that means free right?)

Anyway, I got the impression that by the time lawyer bills come due, we either
have enough cash for it not to be an issue, or we've failed as a company and
are going under anyway...

------
moron4hire
To anyone going out on their own, be it with a company or as a freelancer: if
you don't have an accountant to help you figure out what your taxes will be,
you're A) nuts, and B) losing money.

Scratch that, that goes out to _everyone_. Get an accountant. Stop guessing at
your taxes. You'll save more than you spend. That's their business.

~~~
natch
How do you get an accountant? I've asked friends, and they don't have them,
don't know good local ones, or when I did find someone who had one and was
happy with theirs, I called the accountant and he doesn't return calls.

~~~
moron4hire
First, be persistent. Accountants and their secretaries are people. They don't
necessarily have the best handle on all of their communication streams.

Second, there are these things call "telephone books" that list the "telephone
numbers" of businesses in a section called the "yellow pages". Sorry, snark
aside, it's pretty easy to find info about the accountants in your area (and I
would prioritize finding one that is close, so you can easily visit their
offices to drop off last-minute paperwork). Pick a few in your are and go
visit their offices. Talk to them. See if your bullshit detector goes off.

~~~
gknoy
How do you find a __good__ accountant or lawyer, though? I don't have a clue
how to evaluate that.

~~~
moron4hire
Sometimes you just have to accept that you can't make the perfect-best-
greatest choice on everything.

Just go with one. Flip a coin. See how it goes and talk to people. If their
experiences sound better then yours, jump ship.

------
serkanh
I once got a bill from Florida department of revenue that was close to 40000
for a company i started which had been registered for a while but had no real
revenue. Turns out FDR applies the exact same methodology to calculate the
dues by simply averaging or guessing revenues based on the industry you are
in.

------
mattzito
We got hit with a sales tax audit in NYC here, which apparently is pretty
common. Turned into a multi-week process of providing documentation,
justifying why some of our deals were non-taxed, justifying some of the work
we did, and a little lawyer time.

I think in the end we owed ~$3k. What a waste of everyone's time.

~~~
wernercd
If they say "You owe us 3k", you argue about the 3k.

If they say "You owe use 130k", you argue about the 130k and end up ecstatic
to pay 3k.

Either way, you argue and pay 3k. In option 1, you complain about the 3k. In
option 2, you praise the 3k.

Just my opinion.

Then there is the options that you find fewer loop holes and pay 5k. Or are
totally lazy and pay 130k. Or any shade in between.

Sounds like a good racket for them.

~~~
vonmoltke
The better racket for them is charging your business just to exist.

~~~
cmdkeen
In return for providing the legal protections to both enforce contracts and
protect your personally from the liability of a failed business.

As a small business the value of protection you receive from the state is
incalculably larger than the price you pay.

~~~
vonmoltke
I can get those protections from Texas for free until I exceed $1m in
revenues. Not all states charge your business just to exist.

~~~
_delirium
Texas instead charges your property just for existing (3rd-highest property
tax in the nation). Different states choose different revenue mixes; Texas has
largely chosen property taxes, sales taxes, and oil/gas severance taxes, plus
in recent years the "margin tax" on larger companies.

~~~
vonmoltke
\- Texas doesn't have a state property tax; all property tax revenue goes to
local tax authorities. You could argue this is just shifting a burden
downstream, but I like that system better than a from-on-high budget
distribution.

\- Property tax applies to all real estate, not just businesses, so I'm not
sure what this has to do with business taxes.

\- We don't have a personal income tax.

~~~
rmah
<i>\- Property tax applies to all real estate, not just businesses, so I'm not
sure what this has to do with business taxes.</i>

Actually, Texas (or perhaps local authorities) levies a property tax on all
business assets. If you host a website on a server in texas, they will levy a
property tax on the server. Sometimes that's paid by the hosting firm.
Sometimes, it's passed on to clients.

If you don't believe me, look it up.

~~~
shiftpgdn
I looked this up and found nothing of the sort. I've run a C-Corp in Texas for
7 years now and I'm quite sure our accountant would have brought this up at
some point.

~~~
_delirium
It's the "business personal property" tax. Here are Harris County's
instructions on it:
[http://www.hcad.org/Help/BusPersonalProp.asp](http://www.hcad.org/Help/BusPersonalProp.asp)

 _For taxation purposes, your property is classified as either real property
(land, buildings, and other items attached to land) or personal property
(items that can be owned but are not attached to land). Tangible personal
property that you use to produce income is subject to taxation in the state of
Texas. Tangible personal property includes such things as furniture, fixtures,
inventories, equipment, motor vehicles, vessels, and aircraft. These items are
typically referred to as business personal property._

------
alasdair_
I really wish that there was a good document that outlined all the paperwork
required to run a "standard" Delaware-based C-corp for an online business
located in Silicon Valley.

Things like workmans comp, sales tax, board meetings and minutes requirements,
insurance requirements and the like. No need for lots of explanations, just a
list of all the major things you need to do to run a C-Corp legally.

Does anyone know of such a list?

~~~
MrMike
clerky.com is close

------
btown
Are you me? Had almost exactly the same experience, though we're still in the
prototyping stage and don't have paying customers yet. When I filled out the
DE franchise tax form online, it recalculated to the much smaller amount based
on the $350 minimum. It's worth noting that you should call your agent to see
whether their required forms are just them offering to fill out a form you
could file yourself with state governments, often at an added fee just to fill
out a few lines for you. In my experience, they'll give a straight answer if
you ask.

Also, for any companies doing business in New Jersey, there's a $500 minimum
income tax even if you make no revenue - and even if you put the business on
hold but still keep some assets on the corporation's books at any time that
year - so be aware of that. It's somewhat ironic that for companies operating
at a loss, states often refuse to waive any minimum tax - would they not wish
the companies to be able to put that money towards their success, and to have
a higher probability of generating both jobs and much higher income taxes in
their states in future years? Though I suppose New Jersey is not the state
best known for forward-thinking political practices...

------
ccvannorman
[OP] The e-mail reply from our lawyer: "In theory, the default way of
calculating eventually is lower than the alternative method when a company
becomes large.

Every February we have frantic calls from our clients when they receive their
tax bills."

LOL.. just founder things

------
phantom784
I couldn't help but notice Delaware's "Division of Corporations" is using a PO
Box in Binghamton, NY. Any idea why?

~~~
eth
The address is a "lockbox" location for JP Morgan Chase. Essentially, a
warehouse where a bunch of temp workers open/sort/enter quarterly business tax
remittances for the state of New York, and apparently Delaware.

Fun fact: I lived and Binghamton and worked at said lockbox.

More info: [http://blog.delawareinc.com/delaware-division-of-
corporation...](http://blog.delawareinc.com/delaware-division-of-corporations-
has-a-new-bank-address/)

"Due to the high volume of annual reports and payments that the State of
Delaware receives throughout the year, they use a third party facility to
accept all of these types of payments."

------
frankus
I once got a bill from the California Franchise Tax Board. I had been working
remotely for a California company and barely even set foot in the state, but
they decided I owed them state income tax.

Ended up being easier to pay up than dispute it (~$250).

------
mrfusion
How much taxes do LLC's pay in Delaware? Would I still have to pay my home
state's property taxes?

~~~
tigerente
$250 pa to Delaware, $300 as of July 1, 2014.

------
emcrazyone
I would have guess it to be a scam. Why does the State of Delaware use a
Birmingham, NY address?

~~~
mkohlmyr
For tax reasons. Badum tsch.

------
27182818284
Same thing happened to us. We hired a proper CPA and it was fixed.

------
justin66
What did you actually owe?

------
cody3222
This happened to me!

------
korzun
> Any other startups here gotten a nice "tax surprise"? Would love to hear
> about it!

You registered in Delaware without figuring out how much actual taxes you will
have to pay. If you did, you would know right away that that invoice was
bogus.

Not sure why this is on the front page.

~~~
jpmattia
> _Not sure why this is on the front page._

Everyone is a noob sometime, and the first Delaware Tax Bill is a pretty
common cause of heart attacks for new founders.

Since I wish I'd seen an article like this when I started out, I don't really
begrudge OP or the upvoters for putting this reminder on the front page.

~~~
korzun
You should probably not form an entity if you are not reading tax
ramifications.

Also, 2 second google search will answer all the questions one might have
about this invoice. You can also use the calculator they clearly advise you to
use within the invoice.

Not a front page material.

~~~
jasonlotito
> Not a front page material.

Hello! You are new here. Please be sure to read this:

[https://news.ycombinator.com/newsguidelines.html](https://news.ycombinator.com/newsguidelines.html)

"Please don't submit comments complaining that a submission is inappropriate
for the site. If you think something is spam or offtopic, flag it by going to
its page and clicking on the "flag" link. (Not all users will see this; there
is a karma threshold.) If you flag something, please don't also comment that
you did."

If it's appropriate for the site, it's appropriate for the front page. Simple
as that.

