Delaware Franchise Tax: A Founder's Guide to Staying Compliant
So you’ve incorporated your company in Delaware. You’ve joined the ranks of over 68% of Fortune 500 companies and countless startups who choose the state for its flexible, business-friendly corporate laws. While the benefits are clear, incorporation in Delaware comes with a mandatory annual requirement that every founder must address: the Delaware Annual Franchise Tax Report.
What is this tax, and how can you ensure you’re calculating it correctly? Let’s break it down.
What is the Delaware Franchise Tax?
First and foremost, the Delaware Franchise Tax is not a tax on your income or profit. Instead, it’s a fee you pay to the State of Delaware for the privilege of maintaining your company’s incorporation there.
Every single company incorporated in Delaware must file and pay this tax every year, regardless of its revenue, profitability, or where it conducts business. Even if your company is pre-revenue or dormant, you are still required to pay.
The deadline for corporations is March 1st of each year.
The Two Methods of Calculation: A Critical Choice
This is where things can get confusing—and potentially expensive if you’re not careful. Delaware provides two different methods for corporations to calculate their franchise tax. You are allowed to calculate your tax using both methods and pay the lesser of the two amounts. For most startups, the difference can be thousands of dollars.
Method 1: The Authorized Shares Method (The Default)
This is the default method used by the State of Delaware. The calculation is based solely on the number of shares your corporation is authorized to issue.
- 5,000 shares or less: $175 (minimum tax)
- 5,001 – 10,000 shares: $250
- For each additional 10,000 shares (or portion thereof): Add $85
Many startups authorize millions of shares to accommodate investors and employee stock option pools. If you use this default method with, for example, 10,000,000 authorized shares, you could receive a tax bill for over $85,000. This often causes panic, but there is a better way.
Method 2: The Assumed Par Value Capital Method (The Founder-Friendly Method)
This method is more complex but almost always results in a significantly lower tax liability for startups and early-stage companies. It calculates the tax based on the company’s gross assets and the number of shares that have actually been issued.
The calculation involves using your total gross assets (found on your balance sheet) and the total number of issued shares to determine an “assumed par value,” which is then used to calculate the tax. For companies with low gross assets (typical for most startups), this method will almost always result in the minimum tax payment, which is typically **$450** ($450 tax + annual report fee).
While the minimum tax under this method ($400) is higher than the absolute minimum under the Authorized Shares method ($225), it saves founders with a large number of authorized shares from receiving an astronomically high tax bill.
Don’t Let a Simple Filing Become a Major Headache
Choosing the wrong calculation method can lead to a shocking and unnecessary tax bill. Failing to file by the March 1st deadline results in a $200 late penalty plus 1.5% monthly interest on the outstanding balance.
Navigating state tax requirements is one of the many post-incorporation hurdles that can distract you from your core mission. At Taxculate, we handle these complexities for you. We ensure your Delaware Franchise Tax is calculated using the most advantageous method, filed correctly, and paid on time, every time.
