My Delaware franchise taxes seem very high – how do I lower them?
Takeaway: Do not panic over the initial high Delaware franchise tax notice; it is almost always based on the default "Authorized Shares Method," and you can dramatically lower your bill by recalculating your tax using the "Assumed Par Value Capital Method."
Sometime in late winter, every founder of a newly incorporated Delaware C-Corporation experiences a moment of sheer panic. They receive their first annual franchise tax notice from the State of Delaware, and the bill is for a staggering amount—often tens or even hundreds of thousands of dollars. Their immediate thought is that they have made a terrible mistake in choosing to incorporate in Delaware.
This is a classic, and entirely avoidable, founder trap. The good news is that the massive number on that first notice is almost certainly wrong. You have not made a mistake. You simply need to use Delaware's alternative, and far more favorable, method for calculating your tax.
The Default Method: The "Authorized Shares Method"
Delaware has two methods for calculating a corporation's annual franchise tax. The state's default method, and the one used to generate that initial shocking notice, is the Authorized Shares Method. This method calculates your tax based on the total number of shares of stock your company is authorized to issue in its Certificate of Incorporation.
Why it's so high: As we've discussed, most startups authorize a very large number of shares at incorporation (e.g., 10 or 15 million) to provide flexibility for future fundraising. The Authorized Shares Method has a tiered system that results in a very high tax for companies with millions of authorized shares, even if the company has very few assets and no revenue.
The Solution: The "Assumed Par Value Capital Method"
Delaware law provides an alternative calculation that is almost always far more advantageous for early-stage startups. This is the Assumed Par Value Capital Method.
How it Works: This method is not based on the number of authorized shares. Instead, it is based on the company's gross assets and its issued shares. It is a more complex calculation, but for a typical startup that has issued millions of shares at a very low par value (e.g., $0.00001) and has a relatively low amount of gross assets on its balance sheet, this method will result in a much, much lower tax bill.
The Result: Using this method, the company's annual Delaware franchise tax is almost always the legal minimum, which is currently $450 (a $400 tax plus a $50 filing fee).
What You Need to Do
When you receive your annual franchise tax notice, do not simply pay the high amount listed.
Go to the Delaware state website to file your annual report.
The system will give you the option to calculate your tax using either the Authorized Shares Method or the Assumed Par Value Capital Method.
Enter the required information for the Assumed Par Value Capital Method (your total gross assets and your total issued shares, which you can get from your cap table).
The system will recalculate your tax, which will almost certainly be the minimum amount.
Pay the new, lower amount and file your annual report.
This simple recalculation is a rite of passage for every Delaware founder. It is a perfect example of how understanding the specific rules of the road can save your startup thousands of dollars in unnecessary costs.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.