Delaware Franchise Tax: Calculating Both Methods

The authorized shares method calculates your franchise tax based purely on how many shares your certificate of incorporation authorizes you to issue, in tiers that increase as the authorized count goes up, without any regard to how many shares you've actually issued or what the company is actually worth. A startup that authorized a large block of shares at formation, to leave room for future option pool increases and financing rounds, ends up looking enormous by this method's logic even if it has raised very little money and issued only a small fraction of those authorized shares. This is the method Delaware's own annual report system defaults to showing first, which is exactly why so many small companies overpay without realizing there's another option.

The assumed par value capital method looks at your actual issued shares and your total gross assets instead of your authorized share count. It backs into an assumed value per share using your total gross assets divided by your total issued shares, adjusted for any shares with a stated par value above that assumed figure, then applies the tax rate to your authorized shares at that assumed value. Because it's anchored to what you've actually issued and what you actually own, rather than a large authorized ceiling, it almost always produces a lower bill for an early-stage company that authorized far more shares than it has issued.

Say your company authorized ten million shares at formation, has issued one million of them, and reports two million dollars in total gross assets on its balance sheet. Under the authorized shares method, that ten-million-share authorization alone can push the calculated tax into a bracket most early-stage companies never expect, sometimes tens of thousands of dollars. Run the same facts through the assumed par value method, dividing your two million dollars in gross assets by your one million issued shares, and the assumed value per share comes out low enough that the resulting tax is typically a small fraction of what the authorized shares method produced on the exact same company.

You'll need your total authorized shares and their par value from your certificate of incorporation, your total issued and outstanding shares as of the end of the reporting period, and your total gross assets as reported on your balance sheet for that period, not your revenue or your valuation. Delaware's own franchise tax calculator on the Division of Corporations website will run the assumed par value method for you once you enter these figures, but it only does that if you actively choose that method; left alone, the default report defaults to the authorized shares number.

Gather these inputs before you run either calculation:

• Total authorized shares and their par value, taken from your certificate of incorporation.
• Total issued and outstanding shares as of the end of the reporting period.
• Total gross assets as reported on your balance sheet for that period, not your revenue or your valuation.
• Delaware's franchise tax calculator on the Division of Corporations website, so you can compare both methods before paying whatever number appears first.

Delaware corporations file their annual report and pay any remaining franchise tax by March first each year (larger taxpayers also owe quarterly estimated payments during the year), and the state doesn't waive the deadline just because you're still figuring out which method to use. If you're not sure yet which method comes out lower, run both calculations before the deadline rather than after, since a late payment adds penalties and interest regardless of which method you eventually determine was correct. If you've been paying the authorized shares number for multiple years without checking the alternative, it's worth running last year's numbers through the assumed par value method too, since Delaware allows amended reports for a limited period after the original filing.