California and Delaware Franchise Taxes Are Similar In Name Only

Allen Matkins
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Allen Matkins

Recently, I came across a proxy statement filed a California corporation seeking shareholder approval to reincorporate in Delaware.  In the midst of a lengthy disquisition on the pros and cons of reincorporation, the issuer noted that the franchise taxes payable in Delaware may be greater than the equivalent or other similar taxes currently payable in California.  The problem with this assertion  is that what Delaware denominates as a "franchise tax" is not the same as what California styles as a "franchise tax".   

The Delaware franchise tax is a fee imposed by the State of Delaware for the right or privilege to be a Delaware entity.  It is not based on income or company activity; it is a tax that must be paid to maintain the entity's good standing status.  California's franchise tax is quite different.  It is basically a tax on California source income.  In general, reincorporation will not result in Delaware's franchise tax being substituted for California's franchise tax.  Rather, if it will be an additional tax imposed on the corporation.  

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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