Delaware franchise tax: choose the method before you panic

Two methods, one deadline

Delaware requires every domestic corporation to file an annual report and pay franchise tax on or before March 1. Under the authorized shares method, the tax is $175 for 5,000 shares or less, $250 for 5,001 to 10,000 shares, and $85 for each additional 10,000 shares or part of that. The assumed par value capital method has a minimum of $400. Under both methods the tax cannot exceed $200,000.

The Division of Corporations says the annual report filing fee is $50 for non-exempt domestic corporations. Late payment carries a $200 penalty plus interest of 1.5 percent per month on the tax and penalty. Under the Delaware Code, a corporation that neglects to pay its franchise tax or file its report for a year can have its charter declared void.

How the assumed par value method works

Divide total gross assets by total issued shares, including treasury shares, to get the assumed par. Multiply the assumed par by authorized shares whose stated par is below it, and add the stated par of any authorized shares with par above it. That total is the assumed par value capital. The tax is $400 per $1,000,000 or part of it, with a $400 minimum. Gross assets come from Form 1120, Schedule L, and the annual report must include both issued shares and gross assets.

Example: A startup has 10,000,000 authorized shares at $0.00001 par, 8,000,000 issued shares and $500,000 in gross assets. Under the authorized shares method, the tax is $250 plus 999 increments of $85, or $85,165. Under the assumed par value method, the assumed par is $0.0625, assumed par value capital is $625,000, and the tax is the $400 minimum. Both figures exclude the annual report fee.

Avoid the surprise bill

If a corporation does not report its issued shares and gross assets, the Delaware Code computes the tax under the authorized shares method. That is why many founders first see a large figure. If you have those figures, you can file using the assumed par value method. Keep your cap table and balance sheet ready in early February so the annual report can be filed accurately.

Increasing authorized shares for a financing or option pool increase affects the calculation under both methods. Before amending the certificate of incorporation, run the numbers. LLCs and other entity types follow different Delaware tax rules, so this guide applies to corporations only.

Your next steps

1. Calendar March 1 and collect issued shares and gross asset figures in advance.
2. Compare the authorized shares and assumed par value methods before paying.
3. Re-run the calculation after any change to authorized shares.