All Delaware Corporations are legally required to file Delaware Franchise Tax each year Deadline: 3/1, Tax Owed: $450+, Penalties: $200 +1.5%/mo of unpaid balance.
Once your startup is incorporated as a Delaware C Corporation, you are legally required to file Delaware Franchise Tax each year — whether or not the company has any income, expenses, or financial activity.
Delaware looks at total share counts and gross assets (i.e. Cash, Treasury Accounts & other investments, Fixed Assets like machinery & equipment, Crypto, Inventory, Investments or Loans to Foreign or Domestic Subsidiaries) to determine the amount of Franchise Tax you owe. There are two methods to calculate the total Delaware Franchise Tax: the Authorized Shares Method and Assumed Par Value Capital Method. Delaware gives startups the flexibility to use the method that results in the lesser tax — in most cases this will be Assumed Par Value Capital Method. The minimum due is $450.
Delaware looks at share counts to calculate the Franchise Tax. There are two methods to calculate the total Delaware Franchise Tax: the Authorized Shares Method and Assumed Par Value Capital Method. Delaware gives startups the flexibility to use the method that results in the lesser tax -- in most cases this will be Assumed Par Value Capital Method. Please note, the total tax will never be less than $125, or more than $200,000.
The Authorized Share Method is Delaware’s default method. This approach uses tax brackets based on share count to determine the tax payment. Corporations with 5,000 or fewer shares will pay the minimum tax. More shares push the corporation to a higher tax bracket. Delaware looks at authorized shares instead of outstanding shares. A corporation will have more authorized shares than outstanding shares. Authorized shares are shares a company can issue. Outstanding shares are shares a company has issued. Corporations use their pool of authorized shares to issue outstanding shares.
The Assumed Par Value Capital Method incorporates authorized shares, outstanding shares, and the corporation’s gross assets. You will need to know all issued shares and total gross assets. Total Gross Assets are “total assets” reported on the U.S. Form 1120, Schedule L (Federal Return) relative to the company’s fiscal year ending the calendar year of the report. For most startups, Gross Assets as of 12/31 will include: Cash, Investments (Brokerage/Money Market/Treasury Accounts), Fixed Assets (laptops, etc.), Crypto, Accounts Receivable, Inventory, Real Estate, Investments or Loans to Foreign or Domestic Subsidiaries. The tax rate under this method is $400 per million or portion of a million shares. If the assumed par value capital is less than $1,000,000, the tax is calculated by dividing the assumed par value capital by $1,000,000 then multiplying that result by $400.
Your Delaware Annual Franchise Tax Report and payment is due by March 1.
The penalty for paying and filing a late Delaware Annual Franchise Tax Report is $200 + 1.5% per month on your outstanding balance due. If you miss the deadline, you will also be in “bad standing” with Delaware until you file. Investors or business partners may look this up during due diligence.
No. As mentioned above, there are two methods to calculate what you owe to Delaware: Authorized Shares Method (AS) and Assumed Par Value Capital Method (APVC). You can use the method that results in lesser tax which is pretty much always APVC. Delaware will by default tell you your tax owed via the AS method, usually resulting in $100k+ in tax owed...this is not right. Use the APVC method and you can expect your DE franchise tax to be about $400 per $1M in Gross Assets + $50 DE filing fee.
Note: There are times where it is greater than this (not more than $10k usually), and that happens when the company has issued a small number of shares (i.e.1M) relative to the amount of shares authorized (i.e. 10M).
When your company does a priced round during the year, you will pay a pro rated amount of franchise tax for the period up to the financing, and the period after the financing. It usually ends up being about $400 per additional $1M in gross assets.
There is a section of the franchise tax return where you in put the gross assets before the financing, and after the financing. The date of the financing is auto-filled by Delaware based on the closing docs. For this section of Gross Assets, you may use the Gross Assets as of the "End Date" minus 1, because the next period includes the "End Date" as the "Begin Date" and if you include the Gross Assets as of that "End Date" and "Begin Date" those Gross Assets will effectively be taxed twice. There's not a lot of guidance on this but it this has been vetted by my tax team. In the Delaware Code: Section 503(b) states that "(b) Unless a corporation shall submit to the Secretary of State, at the time of filing its annual franchise tax report, a statement setting forth the number of shares of each class of stock actually issued, if any, and the amount of the total gross assets of the corporation, as of the nearest date on which the amount is obtainable, including in the statement its goodwill valued at the same amount at which it is valued in the books of account of the corporation, it shall pay a franchise tax for such year computed in the manner prescribed by paragraph (a)(1) of this section." so using this date for gross assets is allowed.
The corporate information you need to file are things like Address, Officer details, and Board member details. The financial information you need:
Gross Assets: Have a 12/31/22 Balance Sheet -or- know your Gross Assets as of 12/31/22 (For most seed/pre-seed stage startups, Gross Assets = Cash Balance; for others Gross Assets = Cash, Investments: Brokerage/Money Market/Treasury Accounts, Fixed Assets: laptops, etc., Crypto, Accounts Receivable, Inventory, Real Estate, Investments or Loans to Foreign or Domestic Subsidiaries.)
Common & Preferred Shares: Have a 12/31/22 Cap Table -or- know your Issued Common & Preferred Shares as of 12/31/22. You can find this in your stock purchase agreement from when you incorporated or request it from your lawyer.
For Pre-Seed/Seed stage startups:
For a lot of startups, this is a common scenario: authorized shares are 10M and then the company issues 8M to the founders. The remaining 2M are authorized but not issued yet. Or maybe you have created an option pool of 1M shares. Option pool shares do not count as issued shares until the options are granted AND exercised (unless you offer early exercise, this is generally 4 years after grant...) tldr; issued common shares are the # shares that have been granted to the founders.
For Series A+ startups:
Issued common shares = # common shares issued to founders + common shares issued to investors Issued preferred shares = # preferred shares issued to founders + preferred shares issued to investors
Your accountant or registered agent (typically charge $200/yr to do this) can handle this for you. If you are looking for a DIY option, you can file yourself on the Delaware site: https://corp.delaware.gov/
If you don’t have an accountant yet, or are busy building your startup to PMF and beyond, Fondo would love to take this off of your plate for $1 or FREE: tryfondo.com/1
This guide for informational purposes only and does not constitute legal or tax advice or create an attorney-client relationship. Companies should consult their own attorneys or tax accountants for advice on these issues. Because of the generality of the issues discussed in this piece, the information provided may not apply in all situations and should not be acted upon without specific legal or tax advice based on particular situations.