Any corporation formed in Delaware—no matter where it conducts business—is required to file an Annual Franchise Tax Report and pay the associated Franchise Tax for the privilege of incorporating there, and both the tax and report must be submitted by March 1 each year.
Delaware calculates its annual franchise tax using one of two main methods: the Authorized Shares Method and the Assumed Par Value Capital Method. Corporations will choose the one that results in a lower payment, and for most startups, the Assumed Par Value Capital Method is frequently cheaper-so don't worry you will not owe $85k this year! Below is an overview of each method, along with examples to help illustrate how to calculate the tax.
AUTHORIZED SHARES METHOD
Under this method, the tax is based on the total number of shares a corporation is authorized to issue, regardless of how many shares are actually issued. The state generally charges a base amount for the first block of shares, then applies an additional fee for each subsequent block of authorized shares. There is also a maximum cap of two hundred thousand dollars, so if the calculated amount exceeds that, the corporation pays two hundred thousand dollars.
Generally, it is calculated by estimating $85 for each 10,000 shares authorized. If there are 5,000 shares or less, then the minimum is tax is automatically calculated at $175. If there are 5,001 – 10,000 shares, then the tax is automatically $250; any additional 10,000 shares are calculated at a rate of $85. The maximum tax owed is $200,000, so if the tax calculated is over that amount it would automatically be $200,000. As most of the startups we work with have 10,000,000 shares authorized at the start, here is a calculation for how your bill was determined to be $85k.
(1) First, an initial 10,000 shares will be subtracted from your 10,000,000 authorized shares to find out how many shares exceed the initial $250.
Calculate 10,000,000 – 10,000 = 9,990,000
(2) Next, the shares left over are divided by 10,000 to determine how many shares need to be multiplied by $85.
9,990,000 / 10,000 = 999
(3) Lastly, 999 is multiplied by $85 to calculate the tax (with $250 added to the final number to represent the initial 10,000 shares subtracted in the first step).
999 x $85 = $84,915 (+$250) = $85,165
Under the authorized shares method, you corporation would owe $85,165 in franchise taxes which is not going to happen thanks to the Assumed Par value method -so don't worry!
ASSUMED PAR VALUE CAPITAL METHOD
This method uses two factors: (1) total gross assets, and (2) the ratio of issued to authorized shares. First, divide your total gross assets by your issued shares. Then multiply that result (the Assumed Par Value) by your authorized shares to find the Assumed Par Value Capital. Next, divide that number by 1,000,000 and multiply by $400. If the result is under $400, the corporation pays $400 as a minimum. If it exceeds $200,000, it is capped at $200,000.
For example, with 10 million authorized shares, 9 million issued shares, and $50,000 in total gross assets, you would: 1) divide 50,000 by 9,000,000 to get approximately 0.005555. 2) Multiply that by 10 million to get 55,555. 3) Dividing 55,555 by 1,000,000 results in 0.055555, which multiplied by $400 is about $22.22. Because that is under $400, you pay the minimum $400.
Comparison
Using the Authorized Shares Method results in a tax of $85,165, while the Assumed Par Value Capital Method yields $400. When a corporation has millions of authorized shares but relatively low gross assets, the Assumed Par Value Capital Method is typically far less costly.
EXAMPLE # 2: Three year old startup with15 million shares authorized, 13 million shares issued, and $250,000 in total gross assets:
Assumed Par Value Capital Method (13 million issued shares, $250,000 total gross assets):
Calculate the Assumed Par Value: $250,000 ÷ 13,000,000 =0.0192
Multiply by the total authorized shares (15 million): 0.01923 × 15,000,000 =288,450
Divide by 1,000,000 and multiply by $400: (288,450 ÷ 1,000,000) × $400 = $115.38
Since $115.38 is below the $400 minimum, the corporation pays the $400 minimum. Franchise tax using the Assumed Par Value Capital Method: $400
COMPARING THE METHODS
To ensure the lowest possible payment, corporations generally calculate the tax both ways. The Delaware Division of Corporations website offers a “Recalculate Tax” feature, making it simple to check which method yields a smaller number. Keep in mind that both methods have a floor (either one hundred seventy-five or four hundred dollars, depending on the exact scenario) and a ceiling of $200,000.
Comments