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Delaware Franchise Tax

SocoTax
There are two separate methods to calculate Delaware’s franchise tax. The total amount of franchise tax due could vary tremendously depending on which method is chosen. The State of Delaware’s default method is the ‘Authorized Shares Method’ which often leads to higher amounts due. If your startup company received a notice from the State of Delaware saying you owe thousands of dollars, this is the result of Delaware’s default method. The ‘Assumed Par Value Method’ uses a trickier formula but could ultimately save your company money. This method almost always results in lower tax amount for startups.

Authorized Shares Method

The Authorized Shares Method is Delaware’s default method for calculating franchise tax. This method is based on how many shares a company has authorized in its charter (not outstanding):

  • 5,000 shares or less (minimum tax)— $175.00
  • 5,001-10,000 shares— $250.00
  • Each additional 10,000 shares or portion thereof add $75.00
  • Maximum annual tax is $180,000

While this method may be simple to calculate, it may not be the best method for your company.

Assumed Par Value Method

The idea behind the Assumed Par Value Method is to use the company’s “par value” per share as a basis for taxing. However, most companies set their par value extremely low in their certificates of incorporation, so taxing a company based on par value could under compensate the state. Therefore, Delaware came up with a the “Assumed Par Value Method,” which calculates a company’s gross assets as stated on the 1120 Schedule L Federal Tax return divided by all issued and outstanding shares. Assumed Par Value is then rounded to the nearest million dollars and multiplied by 0.035%.

Startups can usually minimize franchise taxes by using the Assumed Par Value method since it calculates tax as a function of total assets. The only issue to watch out for is that even a company with few assets could potentially owe very large franchise taxes if it authorizes a very large number of shares but only issues a small percentage of them.

For Delaware corporations, franchise taxes are due March 1st of every year for the previous calendar year. If a company owes more than $5,000 in franchise taxes, then it must make quarterly tax payments. Those are due at the end of the second month following each quarter (i.e. 40% due on June 1, 20% due on September 1, 20% due on December 1, and remainder due on March 1). Note that both methods require a $50 report filing fee. If a company fails to pay on time, they will own $125 plus a 1.5% monthly interest rate on monies owed.

Need to Amend a Delaware Franchise Tax Report?

If you run into any difficulties calculating your Delaware franchise tax report, feel free to contact us for more information at admin@socotax.com. We can amend your certificate by lowering the amount of authorized shares to save you money. All you’ll need is a copy of your previously submitted Delaware Franchise Report and the information needing to be amended. Go to the Delaware Division of Corporations website and update your file.

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