Written March 1, 2019
There are two methods of calculating the Delaware franchise tax, and the bill you get in the mail defaults to the method that is far more expensive.
The Authorized Shares Method calculation of Delaware Franchise Taxes The bill Delaware sends out for franchise taxes is based on the number of shares the startup corporation has authorized, known as the “Authorized Shares Method.”
-$75 for the first 5000 shares; -$150 for 5,001 – 10,000 shares; or -$150 plus $75 for each additional 10,000 shares (or portion thereof) above 10,000 shares.
Thus, if your startup authorized 10,000,000 shares, your startup’s Delaware franchise taxes bill will likely be $75,075. Not exactly a number a bootstrapped startup wants to see, right?
Thankfully, there is an alternative way to calculate your startup’s Delaware franchise taxes — and one that is very likely to lead to a much lower tax bill.
Assumed Par Value Method calculation of Delaware Franchise Taxes Instead of using the Authorized Shares Method, a Delaware startup can choose to have its annual franchise taxes calculated using the “Assumed Par Value Method.” In this method, your franchise tax bill is calculated based on all issued shares, authorized shares, and total gross assets in the following manner:
Step 1: Divide Total Gross Assets by Total Issued Shares (“Assumed Par Value”)
Step 2: Multiply Assumed Par Value by Total Authorized Shares (“Assumed Par Value Capital”) Step 3: The franchise tax is calculated at $350 per every $1,000,000 or portion thereof of
Here’s an example of a calculation of a startup with total gross assets of $250,000, 5 million issued shares and 10 million authorized shares:
Step 1: $250,000/5,000,000 shares = $0.05 Assumed Par Value
Step 2: $0.05 * 10,000,000 shares = $500,000 Assumed Par Value Capital
Step 3: $350 * ($500,000/$1,000,000) = $175.00 Franchise Tax (your actual bill will be $450 because that's the minimum franchise tax plus the annual report fee, but still a lot better than $75,075!)
Payment Instructions You'll pay your taxes online with a credit card by March 1st. The online form defaults to the Authorized Share Method, but if you fill in gross assets it will use the Assumed Par Value method.
If a company owes more than $5,000 in franchise taxes, then it must make quarterly tax payments: 40% due on June 1st 20% due on September 1st 20% due on December 1st and the remainder due on March 1st.
Any positive balance goes towards next year. Failure to file by the deadlines will cause a company to fall out of good standing with the state, which can complicate, delay or even prevent a range of possible transactions, including funding transactions.
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