What is Delaware Franchise Tax?

The Delaware Franchise Tax is a mandatory annual fee that all Delaware C Corporations must pay, irrespective of their financial activity or income. The minimum tax owed is $450, and the deadline for the tax report and payment is March 1 each year. Failure to meet this deadline results in a penalty of $200 plus 1.5% per month on the unpaid balance and can affect the company’s standing with the state​​​​​​.

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Devil in the Details: Authorized Shares vs. Assumed Par Value

The confusion and panic often arise from the method used to calculate the tax. Delaware offers two methods: the Authorized Shares Method and the Assumed Par Value Capital Method.

• Authorized Shares Method: This default method calculates tax based on the number of shares a corporation is authorized to issue. It can lead to higher tax figures, especially for companies with many authorized shares.
• Assumed Par Value Capital Method: Often resulting in a lower tax amount, this method considers the corporation’s issued shares and gross assets. This is generally the more favorable option for startups, with tax rates being about $400 per million (or a portion thereof) of the assumed par value capital​​​​.

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Understanding High Tax Notices

For founders of Delaware C Corporations, the annual Delaware Franchise Tax can be a source of significant stress, especially when they receive unexpectedly high tax bills. This high figure typically results from the Authorized Shares Method. Founders should reassess their taxes using the Assumed Par Value Capital Method, which usually results in a significantly lower tax obligation​​.

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Impact of Fundraising Rounds

For companies that have raised funds through a Series A round (or similar), the franchise tax is prorated before and after the financing. This can slightly increase the tax amount based on the additional gross assets acquired post-financing​​.

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Preparation for Filing

To prepare for filing the Delaware Franchise Tax, companies should have their corporate information (such as address and officer details) and financial information (including gross assets and issued shares) ready. For most startups, especially in the seed or pre-seed stage, the gross assets may simply be their cash balance. However, for others, it might include a broader range of assets​​.

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