The New Year. For some, it’s time to reflect on the past and look forward to the future. For others, it’s time to make resolutions to change for the better. But for me, it’s time to respond to client inquiries regarding their apparent 5-figure bill for Delaware franchise taxes due March 1.
Authorized Shares Method calculation of Delaware Franchise Taxes
The bill for Delaware franchise taxes sent out by Delaware is based on the number of shares the startup corporation has authorized, known as the “Authorized Shares Method”:
-$75 for 1-5,000 shares;
-$150 for 5,001 – 10,000 shares; or
-$150 PLUS $75 for each additional 10,000 shares (or portion thereof) above 10,000 shares.
Thus, if your startup authorized 10,000,000 shares, your startup’s Delaware franchise taxes bill will likely be $75,075. Not exactly a number a bootstrapped startup wants to see, right? Thankfully, there is an alternative way to calculate your startup’s Delaware franchise taxes — and one that is very likely to lead to a much lower tax bill.
Assumed Par Value Capital Method calculation of Delaware Franchise Taxes
Instead of using the Authorized Shares Method, a Delaware startup can choose to have its annual franchise taxes calculated using the “Assumed Par Value Capital Method.” In this method, your startup’s Delaware franchise tax bill is calculated based on all issued shares, authorized shares, and total gross assets in the following manner:
Step 1: Divide Total Gross Assets by Total Issued Shares (“Assumed Par Value”)
Step 2: Multiply Assumed Par Value by Total Authorized Shares (“Assumed Par Value Capital”)
Step 3: The franchise tax is calculated at $350 per every $1,000,000 or portion thereof of Assumed Par Value Capital.
Here’s an example of a calculation of a startup with total gross assets of $250,000, 5,000,000 issued shares and 10,000,000 authorized shares:
Step 1: $250,000/5,000,000 shares = $0.05 Assumed Par Value
Step 2: $0.05 * 10,000,000 shares = $500,000 Assumed Par Value Capital
Step 3: $350 * ($500,000/$1,000,000) = $175.00 Franchise Tax
(Note: The example assumes the startup’s actual par value on its shares (i.e., in the charter) is lower than the assumed par value. Otherwise, the actual par value is used in place of the assumed par value in Step 2 above)
Most startups will benefit by using the Assumed Par Value Capital Method when calculating its Delaware Franchise Taxes. The problem is that your startup isn’t given this option until it actually logs on to the Delaware state site to file and pay the annual franchise tax.
UPDATE: Delaware increased its minimum franchise tax using the assumed par value capital method to $350.