Why Should Delaware Care?
Last month, Gov. Matt Meyer proposed a nearly $7 billion dollar package for the 2027 fiscal year that included fee increases on businesses that make up the state lucrative corporate franchise. While it remains to be seen just how much of Meyer’s proposal will be kept intact by the legislature, lawmakers on Wednesday appeared supportive of the measures which help to defray taxes for residents.
Delaware’s golden goose will likely become even more lucrative later this year.
Gov. Matt Meyer’s proposed budget includes increases in the annual fees paid by limited liability companies and other types of Delaware businesses that are not corporations. It also calls for an increase in the fees to businesses that seek expedited services from the state.
The increases, which would not impact the taxes paid by corporations, would result in an extra $81 million to the state’s General Fund during the next fiscal year. The $2 billion corporate franchise system in Delaware, which largely serves out-of-state businesses with legal services, is a major driver for the state’s lower cumulative tax burden on residents.
During a budget hearing with lawmakers Wednesday, Secretary of State Charuni Patibanda-Sanchez said the annual fee increases are targeted at “alternative entities,” such as LLCs, general partnerships, and limited partnerships. Those businesses typically account for more than 75% of the more than two million Delaware companies that exist.
Currently, owners of LLCs pay $300 a year to keep the entity active within Delaware’s system – a fee that hasn’t changed in a decade. The Meyer administration is proposing to increase the fee by about $50.
Fees paid by such businesses contribute to an outsized amount of money that the Delaware Division of Corporation sends each year to the state’s General Fund, which pays for everyday government operations, such as schools.
Last year, that figure was a hefty $2.1 billion, Patibanda-Sanchez told lawmakers on Wedensday.
“I am really happy to report, after one year, we still are the corporate capital of the world,” she said.
The secretary of state’s comments come a year after Tesla CEO Elon Musk led a vocal campaign that called on business leaders to reincorporate their companies out of Delaware. While several high-profile companies, such as Coinbase and Dropbox, followed the call, others that threatened to, such as Meta, have remained in the state.
Most of the millions of companies that are domiciled in Delaware — from Meta to shell LLCs — do not have a physical presence in the state. Instead, they maintain a legal presence, through a third-party registered agent, that subjects them to Delaware ‘s corporate laws.
Asked by State Sen. Eric Buckson (D-Dover South) whether Delaware suffered a loss last year of “big fish” companies, Patibanda-Sanchez said there are now more large corporations domiciled in Delaware than there were last year. The biggest corporations in Delaware pay a hefty franchise tax of $250,000 to the state.
Later in the budget hearing, State Sen. Darius Brown (D-Wilmington) asked Patibanda-Sanchez whether Delaware should increase business fees even more. In response, the secretary of state said she did not want to increase costs on LLCs, noting that it is the entity type that several small business owners chose to operate under.
“The other fees absolutely we can discuss more,” she said during the hearing. “Again, we don’t like to shock our customers. We have 2.2 million of them.”
The fee increases for LLCs and other smaller companies are part of Meyer’s $6.9 billion budget proposal. During a press conference to unveil the proposal last month, Meyer and his staff said the budget includes what he called “targeted” cuts that would dig the state out of a roughly $500 million deficit caused by the inflationary pressures from health care spending and employee salaries.
Meyer’s budget also includes a handful of revenue increases, such as upward bumps in the state’s cigarette tax and in the business fees.