How to Calculate Delaware Franchise Tax

If your company is incorporated in Delaware, you generally have to pay an annual Delaware franchise tax to maintain your good standing. The amount you owe depends on factors such as your number of authorized shares, the company’s assets, and the method you use to calculate the tax.

For most Delaware corporations, there are two ways to calculate franchise tax:

• The Authorized Shares Method
• The Assumed Par Value Capital Method

Delaware calculates your tax under both methods and lets you pay the lower amount, subject to minimum and maximum tax requirements.

Here’s how each method works and how to calculate your Delaware franchise tax.

How to Calculate Delaware Franchise Tax

The first step is to determine which calculation method produces the lower tax.

Method 1: Authorized Shares Method

The Authorized Shares Method calculates your franchise tax based primarily on the number of shares your corporation is authorized to issue.

For corporations with 5,000 or fewer authorized shares, the calculation is relatively simple:

• $175 minimum tax for up to 5,000 shares
• $250 for each additional 10,000 shares or portion of 10,000 shares

For example, a corporation with 10,000 authorized shares would owe $250 under this method.

A corporation with 100,000 authorized shares would owe $2,500.

The Authorized Shares Method can become expensive for startups that authorized a large number of shares but have relatively few assets.

Method 2: Assumed Par Value Capital Method

The Assumed Par Value Capital Method considers both your company’s total gross assets and the number of authorized shares.

The basic formula is:

Assumed Par Value = Total Gross Assets ÷ Total Number of Issued Shares

That assumed par value is then multiplied by the number of authorized shares to determine the corporation’s assumed par value capital.

The resulting amount is used to calculate the franchise tax.

For startups with a relatively small number of assets compared with their authorized shares, this method can produce a significantly lower tax bill.

How to Calculate Gross Assets for Delaware Franchise Tax

Gross assets are an important part of the Assumed Par Value Capital Method.

For Delaware franchise tax purposes, gross assets generally correspond to the total assets reported on the corporation’s balance sheet for the relevant accounting period.

This can include:

• Cash and cash equivalents
• Accounts receivable
• Inventory
• Equipment and other property
• Investments
• Other assets reported on the balance sheet

The important point is that you generally use the company’s total assets, not just its cash balance.

For example, if your startup has:

• $500,000 in cash
• $50,000 in accounts receivable
• $25,000 in equipment

Its total gross assets would be $575,000.

That figure would then be used in the Assumed Par Value Capital Method calculation.

Example: Calculating Delaware Franchise Tax

Let’s say a Delaware corporation has:

• 10,000,000 authorized shares
• 2,000,000 issued shares
• $1,000,000 in total gross assets

First, calculate the assumed par value:

$1,000,000 ÷ 2,000,000 issued shares = $0.50 assumed par value

Next, multiply the assumed par value by the number of authorized shares:

$0.50 × 10,000,000 authorized shares = $5,000,000 assumed par value capital

The corporation then uses that amount to calculate its franchise tax under the Assumed Par Value Capital Method.

The corporation should compare that result with the Authorized Shares Method and use the method that produces the lower tax, subject to Delaware's applicable minimum and maximum tax rules.

Which Delaware Franchise Tax Method Should You Use?

There isn't one method that is always better.

The Authorized Shares Method may be easier to calculate, but companies with a large number of authorized shares can end up with a higher tax bill.

The Assumed Par Value Capital Method can be more favorable for startups with significant authorized shares but relatively low gross assets.

This is one reason it's important to look at both calculations rather than assuming the simplest method is the cheapest.

When Is Delaware Franchise Tax Due?

Delaware corporations generally must file their annual report and pay franchise tax by March 1 each year.

The franchise tax applies even if your company:

• Has not generated revenue
• Has not made a profit
• Is pre-revenue
• Has not started operating

If your startup is incorporated in Delaware, the franchise tax is generally an ongoing cost of maintaining the corporation.

How Do You Calculate Delaware Annual Franchise Tax for a Startup?

For a startup, the calculation can be especially important because the company may have many authorized shares but relatively few assets.

To estimate your Delaware franchise tax:

1. Determine the number of authorized shares.
2. Determine the number of issued shares.
3. Calculate your company's total gross assets.
4. Calculate the tax using the Authorized Shares Method.
5. Calculate the tax using the Assumed Par Value Capital Method.
6. Compare the two amounts.
7. Pay the lower applicable amount, taking Delaware's minimum and maximum tax rules into account.

Your accounting records are particularly important for the Assumed Par Value Capital Method because the calculation depends on the company's reported assets.

What If Your Startup Has Raised Venture Capital?

A funding round can significantly change your company's balance sheet.

If your startup raises $5 million and the cash is still on the company's balance sheet at the relevant point in the year, those assets can affect the Assumed Par Value Capital Method calculation.

That's why it's a good idea to calculate your Delaware franchise tax using current financial information rather than relying on last year's estimate.

Your cap table also matters. Changes to authorized or issued shares can affect the calculation, so your accounting and corporate records need to tell the same story.

Frequently Asked Questions

How do you calculate Delaware franchise tax?

Delaware corporations generally calculate franchise tax using either the Authorized Shares Method or the Assumed Par Value Capital Method. You compare the resulting amounts and generally pay the lower applicable tax, subject to Delaware's minimum and maximum tax rules.

How do you calculate gross assets for Delaware franchise tax?

Gross assets are generally based on the total assets reported on the corporation's balance sheet for the relevant accounting period. This can include cash, accounts receivable, inventory, equipment, investments, and other assets.

How do you calculate franchise tax in Delaware?

To calculate franchise tax in Delaware, determine your authorized and issued shares and total gross assets. Then calculate the tax using both available methods and compare the results.

How do you calculate Delaware annual franchise tax for a startup?

Startups should calculate the Delaware franchise tax using their current share structure and financial information. The Assumed Par Value Capital Method may be worth evaluating if the company has many authorized shares relative to its assets.

Does a Delaware startup have to pay franchise tax if it has no revenue?

Yes. Delaware franchise tax generally applies to corporations regardless of whether they have generated revenue or made a profit.

The Bottom Line

Calculating Delaware franchise tax can look complicated, especially for startups with millions of authorized shares and changing balance sheets. The key is to calculate the tax using both methods and make sure you're using accurate share and asset information.

If you're not sure which method applies to your company or want help making sure your Delaware franchise tax calculation is accurate, Fondo can help with the accounting and tax work behind the calculation.

Learn more about Fondo's TaxPass.

‍