Delaware franchise tax: the two methods, plainly

Why the first bill looks alarming

Delaware sends (or posts, for online filers) an annual franchise tax notice calculated under the Authorized Shares Method by default. That method looks only at one number: how many shares the certificate of incorporation authorizes the corporation to issue. It does not ask how many shares are actually outstanding, what the company is worth, or how much cash it holds.

Venture-backed startups typically authorize a large share pool up front — often 10,000,000 or more — to leave room for employee option pools and future financing rounds without repeated charter amendments. Under the Authorized Shares Method, that large authorized-but-unissued pool drives the bill up sharply, because the schedule adds a fixed amount for every additional block of shares. A company with a handful of employees and no revenue can open its March notice to find a franchise tax bill running into five figures.

The Assumed Par Value Capital Method: how the alternative works

Delaware's statute lets a corporation instead calculate tax under the Assumed Par Value Capital Method, which uses two inputs from the company's own balance sheet and share structure: total gross assets (as reported on the corporation's most recent U.S. federal tax return, or a reasonable estimate for a newly formed company) and total issued shares — not authorized shares.

The mechanics: the corporation calculates an "assumed par" figure per share from gross assets divided by issued shares, compares that to the shares' actual stated par value, and applies the higher of the two to compute "assumed par value capital." Tax is then charged per $1,000,000 (or portion of $1,000,000) of that assumed par value capital. Because the calculation is anchored to actual assets and actually issued shares rather than the full authorized pool, it is very often lower for a company that has authorized far more shares than it has issued — which describes most funded startups.

A corporation is entitled to use whichever of the two methods produces the lower tax. This is not a discretionary election granted case by case; it is written into the statute, and the Delaware Division of Corporations' own online franchise tax calculator lets a filer enter figures and compare both results side by side before paying.

The March 1 deadline and the annual report

Every active domestic corporation must file its Delaware annual report and pay any franchise tax due for the prior calendar year on or before March 1, filed online through the Division of Corporations. This is separate from — and unrelated to — a company's federal or state income tax filing deadlines.

A non-exempt domestic corporation also owes an annual report filing fee alongside the franchise tax itself (see Figures). Missing the March 1 deadline triggers a flat penalty plus monthly interest on the unpaid balance, both set by statute, and continued non-payment can eventually lead to the corporation losing its good standing in Delaware.

A corporation whose total franchise tax liability exceeds a statutory threshold is required to pay in estimated installments across the year rather than as a single March 1 payment — a detail that mainly affects larger, more mature corporations rather than early-stage startups still working out which of the two methods applies to them.