Delaware Franchise Tax: Everything You Need To Know!

Franchise Tax is the fee imposed by the State of Delaware for the right or privilege to own a Delaware company. The tax has no bearing on income or company activity; it is simply required by the State of Delaware to maintain the good standing status of your company.

The term “Franchise Tax” does not imply that your company is a franchise business. All companies pay a Delaware Franchise Tax, regardless of their business income, business model, or company structure.

The Delaware Franchise Tax for a corporation is based on your corporation type and the number of authorized shares your company has. The total cost of the corporation’s Delaware Franchise Tax consists of an annual report fee and the actual tax due.

DE LLCs – For Delaware LLCs, the franchise tax is fixed at $300 per year.

There are 2 methods that DE C-Corporations can structure their annual franchise tax. We provide this option to you so that you can structure/reduce your Franchise Tax.

Method 1 – Default Method – Authorized Share Method

What are Authorized shares?

Authorized shares are the maximum number of shares that can legally be issued to shareholders. This number is established by the company’s articles of incorporation.

What are Issued shares?

Issued shares are the number of shares actually given or allotted to the shareholders.

A company cannot issue more shares than the authorized number of shares. The number of issued shares can not exceed the number of authorized shares.

Example – You can have 1 Million authorized shares, but you only issue 700,000 shares to yourself and your team in whichever combination you’ll have agreed. You’ll leave 300,000 shares for investors, employee option pools, and for yourself in the future.

Authorized Share Method Calculation

• 5000 shares or less, pay the minimum $175 tax.
• 5001 to 10,000 shares pay $260 tax ($175+$75).
• For each additional 10,000 shares or part thereof, add $75 to the tax total, with a maximum franchise tax of $200,000.

A corporation with 5,000 authorized shares or less is considered a minimum stock corporation. The Delaware annual report fee is $50 and the tax is $175. A total of $225 is due per year.

A corporation with 5,001 authorized shares or more is considered a maximum stock corporation. The annual report fee is $50 and the tax would be somewhere between $200 and $200,000 per year, as shown below.

Example 1 – Fire Bolt, Inc. has authorized 10 million shares. Because Fire Bolt, Inc. has at least 10,000 shares, they already owe $250. Their total bill will be $250 + $75.00 for each additional 10,000 shares.

1. Subtract 10,000 shares to determine the number of shares to be charged at the $75 rate. 10,000,000 shares – 10,000 shares = 9,990,000 shares
2. Divide by 10,000 shares to determine the number of times the $75 rate will need to be charged. 9,990,000 shares / 10,000 shares = 999
3. Multiply the number of times the $75 rate will be charged by $75. 999 × $75 = $74,925
4. Add $250, the rate charged for the first 10,000 shares, to the amount from the prior step, to obtain the total amount owed. $74,925 + $250 = $75,175

Fire Bolt, Inc.’s franchise tax will be $75,175.

Example 2 – If your Delaware corporation has 1 million authorized shares, your annual franchise tax will be approximately $7,675, using this method.

1. Subtract 10,000 shares to determine the number of shares to be charged at the $75 rate. 1,000,000 shares – 10,000 shares = 9,90,000 shares
2. Divide by 10,000 shares to determine the number of times the $75 rate will need to be charged. 9,90,000 shares / 10,000 shares = 99
3. Multiply the number of times the $75 rate will be charged by $75. 99 × $75 = $7,425
4. Add $250, the rate charged for the first 10,000 shares, to the amount from the prior step, to obtain the total amount owed. $7,425 + $250 = $7,675

Your Delaware Inc’s franchise tax will be $7,675.

Method 2 – Assumed Par Value Capital Method

With this method, your Delaware Franchise Tax is calculated based on authorized shares, issued shares, and total gross assets.

Steps –

1. Divide total gross assets by total issued shares. This will give you your assumed par value.
2. Multiply your assumed par value by your total authorized shares. This will be your assumed par value capital.
3. Your annual DE franchise tax will be $400 for each $1,000,000 of your assumed par value capital. For calculation purposes, you round up to the next million if your assumed par value capital is over $1,000,000.

Example – So if your assumed par value capital from Step 2 comes to $1,001,000, your franchise tax would be $800 ($400+$400). If your assumed par value capital from Step 2 is lower than $1,000,000, your annual franchise tax is restricted to $400. Delaware charges a state processing fee of $50 making your total tax payable as $450.

To recommend you the authorized share capital and par value per share, we need your answer to an important question – How soon are you expecting to raise funds from Investors?

Situation 1 – If you are expecting to raise funds within the next 1 year from the date of registration of your DE C-Corporation, go for 10 million authorized shares at $0.00001 par value per share.

Why this combination?

• This combination gives you enough space to allot shares to yourself and to investors when you raise funds in the next 1 year.
• The starting capital works out to be very low at $100 ($10 million shares * $0.00001 par value) so you don’t have to pay a huge amount as starting capital to start operations for your US company.
• You do not have to incur an additional cost to file a certificate of amendment to increase your authorized shares since you have already authorized a huge number of shares already in place.
• The cost to file a certificate of amendment to increase your authorized shares is as below –
  • Regular State Processing Time of 120 days – $418
  • Expedite State Processing Time of 5 days – $518
• With the above combination, you can select Method 2 (Assumed Par Value Capital Method) to restrict your franchise to $400 which is just $225 higher than the minimum franchise tax of $175.

Situation 2 – If you are NOT expecting to raise funds within the next 1 year from the date of registration of your DE C-Corporation, go for 5000 shares at $0.02 par value per share.

Why this combination?

• You are expecting to raise funds for your company but not immediately or in the next 1 year, so you do not need a very high capital to start with. You can authorize any number of shares up to 5000 to restrict your franchise tax to $175 since that is the minimum tax in Delaware. This is because fund-raising is a lengthy and uncertain process.
• You can always increase the number of authorized shares, later on, by filing a certificate of amendment, if required.
• The cost to file a certificate of amendment to increase your authorized shares is as below –
  • Regular State Processing Time of 120 days – $418
  • Expedite State Processing Time of 5 days – $518
• The benefits from saving the franchise tax of $225 ($400 – $175) each year until you raise funds are higher as compared to the cost of the certificate of amendment and this will keep your franchise tax liability minimal to start with.

Par Value

Par Value per share is the value of the minimal shares as decided by the company issuing such shares. Delaware law allows for a par value as small as $0.000001, thus making it very easy to manipulate your company’s share valuation to start with.

You can also choose any par value per share of your choice.

When Is The Delaware Franchise Tax Due Date?

The due date of your Delaware Franchise Tax payment varies, depending on your company type.

For Delaware C-Corporations – are due by March 1 of every year. If the tax is not paid on or before March 1, the state imposes a $200 late penalty, plus a monthly interest fee of 1.5%.

For Delaware LLCs – Franchise Taxes are due by June 1 of every year. If the tax is not paid on or before June 1, the state imposes a $200 late penalty, plus a monthly interest fee of 1.5%.

If you have any questions on the above, please reach out to me via parshwa@doola.com.

Parshwa Mehta

Doola Sales