Delaware Franchise Tax Calculation | Authorized Shares vs Assumed Par Value

Delaware sends franchise tax bills that can show $170,000+ for a typical startup. The actual amount you owe is almost always $400. Here is how to calculate it correctly.

The Sticker Shock Problem

Every March, Delaware startup founders receive franchise tax bills that look terrifyingly large. A company with 10,000,000 authorized shares might receive a bill for $170,165. This number is calculated using the Authorized Shares method, which is the default method Delaware uses on its billing statements. However, Delaware law allows you to calculate your tax using either the Authorized Shares method or the Assumed Par Value Capital method, and you pay whichever is lower. For nearly every early-stage startup, the Assumed Par Value method produces the $400 statutory minimum. If you are paying more than $400 without understanding why, you are likely overpaying.

The Authorized Shares Method

This method is simple but punitive for startups. The tax is based solely on the number of authorized shares in your certificate of incorporation, regardless of how many you have issued or what they are worth. The rates are: 5,000 shares or fewer, $400; 5,001 to 10,000 shares, $400 plus $85 per additional 10,000 shares (or fraction thereof). The formula continues scaling up with a maximum tax of $200,000 plus $85 for each additional 10,000 shares above a certain threshold. For a company with 10,000,000 authorized shares, the math produces roughly $170,165. This method makes no sense for startups that have authorized millions of shares but issued only a fraction and have minimal assets.

The Assumed Par Value Capital Method

This method considers three inputs: total authorized shares (all classes), total issued shares (all classes), and total gross assets as reported on your federal tax return (Form 1120, Schedule L). The calculation works as follows. First, divide total gross assets by total issued shares to get the assumed par value per share. If this is less than the actual par value stated in your certificate of incorporation, use the actual par value. Second, multiply the assumed par value by the total number of authorized shares to get the assumed par value capital. Third, apply the tax rate: $400 per $1,000,000 of assumed par value capital (or fraction thereof), with a minimum of $400. For a startup with 10,000,000 authorized shares, 2,000,000 issued shares, and $500,000 in gross assets, the assumed par value is $500,000 / 2,000,000 = $0.25 per share. Assumed par value capital is $0.25 x 10,000,000 = $2,500,000. Tax is 3 x $400 = $1,200. Much better than $170,165.

Why Most Startups Pay $400

In the earliest stage, a startup has authorized 10,000,000 shares, issued 5,000,000 to founders, and has gross assets under $500,000 (typically just the cash from a seed round plus some equipment). The assumed par value is $500,000 / 5,000,000 = $0.10. Assumed par value capital is $0.10 x 10,000,000 = $1,000,000. Tax is $400 (1 x $400 per million). The minimum tax is $400, so that is the bill. As your company grows, raises larger rounds, and accumulates assets, the Assumed Par Value method tax will increase, but it typically stays well below the Authorized Shares method figure until the company reaches substantial scale. The lesson: always calculate both methods and pay the lower amount.

Filing Deadlines and Penalties

The Delaware franchise tax and annual report are due by March 1 each year. A late filing incurs a $200 penalty plus 1.5% monthly interest on the unpaid tax. If you fail to pay for two consecutive years, Delaware can void your corporation's charter, which means your company technically ceases to exist as a legal entity. Reinstating a voided charter requires paying all back taxes, penalties, and interest, plus a reinstatement fee. For a company with a large Authorized Shares method bill that has been accruing penalties, the reinstatement cost can exceed $50,000. We set up automatic reminders and handle the filing for all SpryTax clients to prevent this scenario.

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How to Calculate Your Delaware Franchise Tax (And Avoid Overpaying)