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. Here’s how to avoid the surprise on your Delaware franchise tax bill.
Authorized Shares Method for 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”:
-$175 for 1 to 5,000 shares;
-$250 for 5,001 to 10,000 shares; or
-$250 plus $85 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 $85,165 under this method. Not exactly a number a bootstrapped startup wants to see. 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 for 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, par value, 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 $400 per every $1,000,000 or portion thereof of Assumed Par Value Capital (subject to the $400 minimum under this method).
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: $400 * ($500,000/$1,000,000) = $200.00, but because the minimum tax under this method is $400, the franchise tax would be $400.00
(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)
Two quick reminders: (1) Delaware domestic corporations must file the annual report and pay franchise taxes by March 1 each year, and the annual report filing fee is currently $50 (in addition to the franchise tax). (2) The franchise tax is capped at $200,000 for most corporations under either method (and $250,000 for certain large corporate filers).
Conclusion
Most startups will benefit by using the Assumed Par Value Capital Method when calculating Delaware franchise taxes, but you only see that lower number after you enter the required information when you file. So if you get a scary auto-calculated bill based on authorized shares, do not assume it is your only option. Log in, run the alternative calculation, and then pay the lower amount that applies to your company.
UPDATE: Delaware’s minimum franchise tax is currently $175 under the Authorized Shares Method and $400 under the Assumed Par Value Capital Method (plus the $50 annual report filing fee).
Ryan RobertsStartup Lawyer
Ryan Roberts is a startup lawyer at Roberts Zimmerman PLLC with more than two decades of experience advising startups and venture capital investors. He is the author of “Acceleration” and StartupLawyer.com.
