About that Crazy Delaware Franchise Tax Bill…


Note: The numbers relating to Delaware’s tax rates below are accurate at the time this article was drafted. Delaware may change its charges; you should confirm those numbers at the time of filing.

Delaware’s annual tax on corporations, which it calls a franchise tax, is due March 1st each year. There are two methods of calculating the tax owed, one of which is likely to yield a sticker-shock amount of taxes—so use the other one to calculate your annual Delaware tax.

For most startups and firms with modest revenues, the Authorized Shares method will result in a far higher tax than the Assumed Par Value method. However, Delaware will send a bill using the Authorized Shares method as the default method, unless you then elect otherwise.

In short, usethe Assume Par Value method instead.

This post explains both methods of calculating Delaware franchise tax:

Authorized Shares Method:

Unless you instruct Delaware otherwise, this is the default way Delaware will calculate your annual franchise tax. It is straightforward, but often results in a very high tax bill. You likely owe a lot less by using the Assumed Par Value Method, provided below.

The Authorized Shares method is based entirely on how many shares the corporation has authorized (not to be confused with how many shares you’ve actually issued).

At the time of publication of this article, Delaware calculated fees as followed for the number of authorized shares you have: 

  • 5,000 shares or less (minimum tax): $175.00
  • 5,001 to 10,000 shares: $250.00
  • For each additional 10,000 shares or portion thereof after 10,000 shares: $85.00
  • Maximum annual tax : $200,000.00

ASM Example: A corporation has 10,000,000 authorized shares owes $85,165.00 in annual franchise tax if it uses this method to calculate its franchise tax.

ASM Calculation: $250 for the first 10,000 shares. Then multiply the remaining 999 blocks of 10,000 shares by $85.00 to get $84,915. ((10,000,000 – 10,000)/10,000 x $85.00 = $84,915). Add $250 to the product ($84,915) to get $85,165.00.

In short, you probably do not want to use the above method.

Assumed Par Value Method:

This method is usually far more favorable for startups and other corporations with modest revenues. The assumed par value method essentially calculates tax based on the estimated market capitalization of the corporation. For every $1,000,000 of market capitalization, the company owes $400.00 in tax. (The minimum tax for the Assumed Par Value Capital method is $400.00.)

This method is a bit more complicated to calculate (feel free to start with our examples, below), but could save your thousands or tens of thousands in annual franchise taxes.

  1. This method starts with determining the total gross assets of the corporation, from the U.S. Form 1120, Schedule L (Federal Return) for the company’s most recent fiscal year. (If a corporation has not filed a U.S. Form 1120, a recent balance sheet can be used and amended later.)
  2. The total gross assets of the corporation are divided by the number of all issued shares (not authorized shares) to yield the assumed par value.
  3. Multiply the assumed par value by the number of authorized shares with a par value lower than the assumed par value.
  4. Next, multiply the number of authorized shares with a par value greater than the assumed par by its respective par value (not the assumed par). 
  5. Add the results of 3) and 4) together.
  6. Round up to the nearest million, divide by 1,000,000 and then multiply by $400.00

APV Example: A Delaware corporation has total gross assets of $500,000 and 8,000,000 issued shares. Assume 10,000,000 authorized shares with a par value of $0.00001. This company will pay $400.00 in franchise taxes, the minimum owed under the Assumed Par Value method.

APV Calculation: (2) (as the steps are numbered above) Divide the $500,000 in total gross assets by the 8,000,000 issued shares to get the assumed par value: $500,000 /8,000,000 = $6.25 cents.

(3) Multiply the 10,000,000 authorized shares with a par value of $0.00001 (below the assumed par of 6.25 cents) by 6.25 cents to get $625,000. (10,000,000 x $0.0625)

(4) Because there are no authorized shares with a par value greater than 6.25 cents, skip step 5.

(6) Round $625,000 up to the nearest million à $1,000,000 à divide by $1,000,000 à 1, then multiply by $400.00 to get a total annual tax of $400.00.

Conclusion: Calculate your potential Delaware (annual) franchise tax liability by both methods, then choose the lesser of the two. For most startups and mid-revenue businesses—with millions of authorized shares but moderate gross assets—you’ll have substantially less tax liability under the Assumed Par Value method.

You’ll need to tell Delaware that you want to use that method, because Delaware otherwise assumes you’ll use the Authorized Shares method—likely netting you thousands to tens of thousands in tax liability.