Why is my startup's Delaware franchise tax so high?
For more help with tax and compliance matters, see How can my corporation get help complying with Delaware’s requirements?.
Your startup may have received a very large franchise tax bill from Delaware and, like many of our customers, you may be concerned. Rest assured that Delaware specifies an alternative method your startup can use to calculate the franchise tax. Using this method, most new startups that form on Clerky will owe as little as $400.
How Delaware Calculates Franchise Tax By Default
The bill sent out by Delaware uses the Authorized Shares Method, which calculates the franchise tax based on the number of shares a corporation has authorized. Using this method, Delaware charges $175 for 5,000 shares or less, $250 for 5,001 - 10,000 shares, and an additional $85 for each additional 10,000 shares.
For example, if your startup authorized 10 million shares, your bill would be upwards of $80,000. See the complete example calculation using this method here.
The Alternate Method Used By Most Startups
A startup’s franchise tax bill is often significantly lower when using the Assumed Par Value Capital Method. That’s because the Assumed Par Value Capital Method calculates the franchise tax based on total gross assets, and startups typically don’t have many assets.
For many startups, using this method allows them to pay the minimum tax of $400. See a complete example calculation using this method here.
Note that the franchise tax varies based on the ratio of issued shares to authorized shares. Consequently, startups generally choose to issue a meaningful portion of their authorized shares.
How to Recalculate the Franchise Tax
If you’ve already received a bill from Delaware using the Authorized Shares Method, don’t worry. You can recalculate your bill using the Assumed Par Value Capital Method when you submit your annual franchise tax report on the Delaware Division of Corporations website. See How do I calculate the Delaware franchise tax? for detailed instructions.