Every February, a first-time founder forwards us a notice from the State of Delaware showing a franchise tax bill in the tens of thousands of dollars, with a message that usually contains the word "wrong". The notice is not wrong. It is the higher of two numbers, and Delaware shows it by default.
A startup with 10,000,000 authorised shares, which is the standard number in a YC-style incorporation, will see $85,165 on the notice. The same company, filing the same return with three extra fields filled in, owes $400. Plus a $50 annual report fee either way, due March 1, which is the second date on the C-corp tax calendar.
Two methods, and Delaware picks the expensive one for you
Delaware lets a corporation calculate its franchise tax two ways and pay the lower.
The Authorized Shares method counts shares. Up to 5,000 authorised shares is $175. Up to 10,000 is $250. Every additional 10,000 shares, or fraction, adds $85. The ceiling is $200,000. For 10,000,000 authorised shares that is $250 for the first 10,000 plus 999 blocks at $85, which is $85,165.
This is the number on the default notice, because Delaware knows how many shares you authorised (it is in your certificate of incorporation) and knows nothing else about you.
The Assumed Par Value Capital method uses what the company is actually worth. It takes your total gross assets, divides by issued shares to get an "assumed par value", multiplies that by authorised shares to get an assumed capital figure, and charges $400 for every $1,000,000 of it, with a $400 minimum.
For a seed-stage company the assumed capital is almost always under a million dollars, and the tax is $400.
A worked example
Take a company with 10,000,000 authorised shares at $0.0001 par, 8,000,000 issued to founders and employees, and $600,000 of gross assets at year end (mostly the cash from a pre-seed round).
Assumed par value: $600,000 / 8,000,000 = $0.075 per share. That is higher than the $0.0001 stated par, so the assumed figure is used.
Assumed capital: 10,000,000 x $0.075 = $750,000.
Tax: $750,000 rounds up to one block of $1,000,000, at $400 per block. Tax is $400.
Under the Authorized Shares method the same company owes $85,165. The difference is a form.
What moves the number
Three inputs drive the Assumed Par Value calculation, and founders control two of them.
Gross assets is total assets from your balance sheet, not net of liabilities, as of the last day of the fiscal year. Cash in the bank is the bulk of it for most startups. A company that raised $5,000,000 in December and has $5,000,000 sitting in the bank on December 31 will see its assumed capital and its tax jump. Closing a round on January 2 instead does not change what you owe forever, but it changes which year's return it lands on.
Issued shares is the denominator. More issued shares means a lower assumed par value and a lower tax. Unissued authorised shares are the expensive kind: they count in the multiplication but not the division. A company that authorised 100,000,000 shares and issued 10,000,000 pays ten times the assumed capital of one that authorised and issued the same 10,000,000.
Authorised shares is set in your charter. Reducing it needs a charter amendment, which is rarely worth doing for the franchise tax alone, but it is a reason not to authorise far more than you plan to use.
The other numbers on the bill
The annual report fee is $50 and is owed regardless of method. Late filing adds a $200 penalty plus interest at 1.5% per month.
A Delaware LLC (if you are still choosing) is a different animal: a flat $300 annual tax, due June 1, with no annual report and no method to choose.
And if you are incorporated in Delaware but operate in California, or New York, or Texas, you owe those states their own annual filings and minimum taxes as well. Delaware is the state you chose; the others are the states you are in.
What to do this February
- Pull the balance sheet as of December 31 and read total assets. That needs December closed, which is why we do this in February and not the last week of the month.
- Pull the cap table and read shares authorised and shares issued. Issued means outstanding, not including the option pool that has not been granted.
- Run the Assumed Par Value calculation. Our calculator does both methods side by side and shows the arithmetic: vecty.ai/tools/delaware-franchise-tax-calculator.
- File on Delaware's portal by March 1, choosing the Assumed Par Value method and entering gross assets and issued shares. The portal recalculates and the $85,165 becomes $400.
Every number in this post is an estimate of Delaware's published schedule. The state's own portal determines the final balance. But if the notice is in the tens of thousands and your company has less than a million dollars in assets, the notice is showing you the method you should not use.
Common questions
Why is my Delaware franchise tax notice so high?
The notice uses the Authorized Shares method, which counts the shares Delaware knows about and nothing else: 10,000,000 authorised shares comes to $85,165. The Assumed Par Value method, which uses gross assets and issued shares, usually comes to $400 for a seed-stage company. You choose the method when you file.
How is the Assumed Par Value method calculated?
Divide total gross assets by issued shares to get an assumed par value, multiply that by authorised shares to get assumed capital, then charge $400 for every $1,000,000 of assumed capital, rounded up, with a $400 minimum and a $200,000 maximum. The $50 annual report fee is added either way.
When is Delaware franchise tax due?
March 1 for corporations, together with the annual report and its $50 fee. Filing late adds a $200 penalty plus interest at 1.5% per month. A Delaware LLC is different: a flat $300 annual tax due June 1, with no annual report and no method to choose.
Tools that go with this
- Delaware franchise tax calculator - both Delaware methods side by side, with the arithmetic shown
- State franchise tax and annual report calculator (all 50 states) - the same for every other state you are registered in
- Startup tax deadline calendar - March 1 in context with the rest of the year
- Entity type advisor: LLC vs C-corp vs S-corp - C-corp vs LLC, which decides which Delaware bill you get