Why the first Delaware franchise tax notice looks so large
Delaware's franchise tax notice is often calculated under the Authorized Shares Method, and for a startup with 10,000,000 authorized shares that produces $85,165. You are allowed to pay the lower of that figure and the Assumed Par Value Capital Method, which for most early-stage companies is the $400 minimum.
The catch is that Delaware only uses the second method if you give it the inputs. Under 8 Del. C. §503(b), a corporation that does not report its issued shares and total gross assets with its annual report is taxed under the Authorized Shares Method. If you are paying more than a few hundred dollars and cannot explain why, check which method was used.
The Authorized Shares Method
This method looks only at the number of shares your certificate of incorporation authorizes, regardless of how many are issued or what they are worth. The schedule from the Delaware Division of Corporations:
- 5,000 shares or fewer: $175 (the minimum)
- 5,001 to 10,000 shares: $250
- Each additional 10,000 shares or portion of 10,000: add $85
- Maximum: $200,000 ($250,000 for Large Corporate Filers)
For 10,000,000 authorized shares: the first 10,000 cost $250, and the remaining 9,990,000 shares are 999 blocks of 10,000. 999 × $85 = $84,915, so the total is $85,165. This method only makes sense for companies that authorize very few shares.
The Assumed Par Value Capital Method
This method uses total gross assets, issued shares and authorized shares. Total gross assets are the total assets reported on Form 1120, Schedule L, for the fiscal year ending in the calendar year of the report. The steps:
- Divide total gross assets by total issued shares. The result is the assumed par value per share.
- If the assumed par is lower than the stated par value in your charter, use the stated par value instead.
- Multiply the assumed par by total authorized shares to get assumed par value capital.
- Charge $400 for each $1,000,000 of assumed par value capital or portion of a million. The minimum is $400.
Example: 10,000,000 authorized shares, 2,000,000 issued and $500,000 of gross assets. Assumed par is $500,000 ÷ 2,000,000 = $0.25. Assumed par value capital is $0.25 × 10,000,000 = $2,500,000. That is two full millions plus a portion of a third, so the tax is 3 × $400 = $1,200. Still far below $85,165.
Why most early-stage startups pay $400
Founders usually hold a large share of the authorized stock and the company has modest assets, which keeps assumed par value capital under $1,000,000. Take a company with 10,000,000 shares authorized, 8,000,000 issued to founders and $400,000 of gross assets at year end. Assumed par is $400,000 ÷ 8,000,000 = $0.05. Assumed par value capital is $0.05 × 10,000,000 = $500,000. The tax is the $400 minimum.
The number climbs as you raise money, because cash raised increases gross assets. A company that closes a large round in December will see a higher APVC tax the following March than one that closes in January of the next year. Calculate both methods every year; the state's online filing calculates the tax once you enter the figures.
Worked example: the tax after a seed round
Raising money increases gross assets, which raises the Assumed Par Value Capital tax, but the result is usually still a small fraction of the Authorized Shares figure. Here is a hypothetical company at the end of the year it closed a seed round.
The company has 12,000,000 authorized shares, 10,000,000 issued (8,000,000 founder common and 2,000,000 Seed preferred) and $2,200,000 of total gross assets on December 31, mostly cash from the round. Stated par value is $0.00001.
| Step | Authorized Shares Method | Assumed Par Value Capital Method |
|---|---|---|
| Inputs | 12,000,000 authorized | $2,200,000 assets, 10,000,000 issued |
| Calculation | $250 + (1,199 × $85) | $0.22 assumed par × 12,000,000 = $2,640,000 |
| Tax | $102,165 | 3 × $400 = $1,200 |
The assumed par is $2,200,000 ÷ 10,000,000 = $0.22, well above the $0.00001 stated par, so the assumed figure is used. Assumed par value capital of $2,640,000 is two full millions plus a portion of a third, so the tax is $1,200. Add the $50 report fee and the March 1 payment is $1,250.
The year after a Series A, with several million dollars of cash on the balance sheet, the APVC figure can reach a few thousand dollars. That is normal, and still far below the alternative.
When stated par value raises the tax
Stated par value matters only when it is higher than the assumed par, and then it can raise the tax. Under 8 Del. C. §503(a)(2), if gross assets divided by issued shares is less than the par value of a class, that class is multiplied by its par value instead of the assumed par.
Two hypothetical companies with 10,000,000 authorized shares and 8,000,000 issued show the effect:
- $0.01 par, $50,000 of gross assets. Assumed par is $50,000 ÷ 8,000,000 = $0.00625, which is below $0.01, so par is used. Assumed par value capital is 10,000,000 × $0.01 = $100,000. The calculated tax is $40, and the $400 minimum applies.
- $1.00 par, $500,000 of gross assets. Assumed par is $0.0625, below the $1.00 par, so par is used. Assumed par value capital is $10,000,000, and the tax is 10 × $400 = $4,000.
This is why startup charters typically use a very low par value such as $0.00001 or $0.0001. If your charter has a high par value, ask counsel whether an amendment is worth it before your next filing, since the saving repeats every year.
Where each input comes from
Each number in the calculation has a specific source document, and pulling them from the right place avoids most errors.
- Authorized shares by class: the certificate of incorporation as amended through December 31.
- Issued shares by class: the cap table as of December 31, counting only shares actually issued. Unexercised options, unconverted SAFEs and convertible notes are not issued shares.
- Par value by class: the certificate of incorporation.
- Total gross assets: total assets on the balance sheet for the fiscal year ending in the calendar year of the report, which should match Form 1120, Schedule L.
If the federal return is not done by March 1, use the year-end balance sheet. Make sure the figure reflects any financing that closed before year end.
Due dates, penalties and estimated payments
The annual report and franchise tax for a domestic Delaware corporation are due by March 1 each year, together with the $50 annual report fee. Filing late adds a $200 penalty plus interest of 1.5% per month on the tax and penalty.
Corporations that expect to owe $5,000 or more must make estimated payments: 40% by June 1, 20% by September 1, 20% by December 1 and the remainder by March 1 of the following year.
If a corporation goes one year without paying the tax or filing a complete report, its charter becomes void under 8 Del. C. §510. Reviving it means filing a certificate of revival and paying the back taxes, penalties and interest. If the company was taxed under the Authorized Shares Method all that time, those back amounts are calculated on the large number unless you file amended reports with gross asset figures. We file under APVC for our Delaware clients and keep the gross asset figure tied to the year-end balance sheet. This is general information, not tax advice for your specific facts.
Frequently asked questions
How do I calculate Delaware franchise tax?
Calculate both methods and pay the lower. Under the Authorized Shares Method, pay $175 for up to 5,000 shares, $250 for up to 10,000, then $85 per additional 10,000. Under the Assumed Par Value Capital Method, divide gross assets by issued shares, multiply by authorized shares, and pay $400 per $1,000,000 or portion, with a $400 minimum.
Why does Delaware say I owe $85,165 in franchise tax?
That is the Authorized Shares Method result for 10,000,000 authorized shares, which Delaware uses unless you report issued shares and total gross assets. Enter both figures in the annual report and the tax is recalculated under the Assumed Par Value Capital Method, which for most early-stage startups is the $400 minimum or a little more.
What is the minimum Delaware franchise tax for a corporation?
The minimum is $175 under the Authorized Shares Method, for corporations with 5,000 or fewer authorized shares, and $400 under the Assumed Par Value Capital Method. Every corporation also pays the $50 annual report fee. Most startups authorize millions of shares and file under the Assumed Par Value Capital Method, so their minimum annual payment is $450.
What counts as gross assets for Delaware franchise tax?
Total gross assets are the total assets on the corporation's balance sheet for the fiscal year ending in the calendar year of the report, the same figure reported on Form 1120, Schedule L. It includes cash raised in financings and goodwill at book value. Use the year-end balance sheet if the federal return is not finished before the March 1 deadline.
Do unexercised stock options count as issued shares for Delaware franchise tax?
No. Only shares actually issued and outstanding count as issued shares. Unexercised options, shares reserved in the option pool, unconverted SAFEs and convertible notes are not included. Counting them would raise the issued share count and lower the tax, so including them would understate what you owe. Use the cap table as of December 31.
