Tag Archives: par value

The Delaware Freak-Out

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)

Conclusion

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.

Here is a link to a Delaware Franchise Tax Calculator. Here is a link to FAQ regarding Delaware Taxes.

UPDATE: Delaware increased its minimum franchise tax using the assumed par value capital method to $350.

Par Value for a Startup Company’s Stock

Par value is the minimum price that a corporation can issue its shares.  In the US, par value was created during the time of the great depression in order to ensure a shares could not be sold under a certain price.  Today, that concept is somewhat archaic, but it still plays an important role and should be thoughtfully considered when forming a startup company by filing the certificate of incorporation.

While I typically see either $1 or “no par value” common stock when looking at new client startups that have incorporated on their own or via an online service, I typically recommend that a startup corporation’s Common Stock par value be set at $0.00001 and no higher than $0.0001 per share.

My recommendation is based on my belief that startups should authorize 10,000,000 shares of common stock upon filing the its charter. The startup will then typically issue about 6,000,000 to 8,000,000 shares to its initial set of founders (as there is a reserve usually kept for initial/short term issuances to people like employees, consultants and advisors).

Therefore, if your startup issues 7,000,000 shares with a $0.0001 par value to its initial founders, the minimum the founders would have to collectively pay for those shares is $700. Alternatively, if your startup issued 7,000,000 shares of such common stock with a par value of $0.00001 to the initial founders, the minimum the founders would have to collectively pay would be $70.  Whatever the setup, usually founders are not paying much out of pocket when it comes to purchasing their initial shares.

It’s also very important to set par value low when you authorize many shares in Delaware because this will help keep your franchise taxes low.  There can be drastic consequences, at least Delaware franchise tax bill wise, if you set your par value high and your authorized shares high.

Update: If you are looking for more information about incorporation, check out my “If I Launched a Startup” article.