Delaware Franchise Tax: How to Calculate It With the Assumed Par Value Method

The authorized shares method charges based on how many shares your charter authorizes, in tiers, regardless of your size. For example, a startup that authorized 10,000,000 shares to leave room for options could owe $85,165 under this method, even with no revenue.

The assumed par value capital method ties the tax to the size of your balance sheet. If you use this method, you pay $400 for each $1,000,000 (or portion) of assumed par value capital, with a minimum of $400. Companies with modest assets and many authorized shares generally save the most with this method. Both are available to eligible corporations, and you file using whichever gives the lower result, so always calculate both.

Rates and rules can change, so confirm current figures on the Delaware Division of Corporations website or with your registered agent or tax adviser.

Use the numbers from your annual report and balance sheet as of the date the report requires, usually December 31 of the prior year:

1. Find total gross assets, from the balance sheet or tax return.
2. Find total issued shares, including all classes, and total authorized shares.
3. Divide total gross assets by total issued shares to get the assumed par value per share.
4. If that amount is lower than the stated par value of a share, use the stated par value.
5. Multiply the assumed par by total authorized shares to get assumed par value capital.
6. If you follow the state's formula, divide assumed par value capital by $1,000,000, round up any fraction and multiply by $400, applying the $400 minimum.

Enter your gross assets and share counts exactly as your books show, and keep the workpapers in case the state asks.

Say your company has gross assets of $2,000,000, issued shares of 5,000,000 and authorized shares of 10,000,000. In this example, the assumed par value is $0.40, which is $2,000,000 divided by 5,000,000. Multiplying that by 10,000,000 authorized shares gives assumed par value capital of $4,000,000, which is four units of $1,000,000, so the tax comes to 4 times $400, or $1,600 in this example.

The authorized shares method would charge the same company $85,165 in this example, so the choice saves $83,565. For a company with gross assets of $100,000 and 8,000,000 issued shares, the assumed par is about $0.0125, and assumed par value capital is $125,000, so the tax falls to the $400 minimum.

The savings are real, but the inputs must be right. Use the figures from the same date for assets and shares, and count issued shares, not options that haven't been exercised.

The notice that scares founders is usually the default authorized shares calculation, printed before you've entered your gross assets and issued shares. It's not necessarily what you owe. Follow these steps:

• Log in to the state's franchise tax system before March 1 and choose the assumed par value calculation.
• Gather total gross assets and issued share counts from your books or your cap table.
• File the annual report and pay the calculated tax by the deadline, since late payment adds penalties and interest.
• Keep a copy of your calculation with your corporate records.

If your charter authorizes far more shares than you'll ever issue, ask counsel whether an amendment makes sense, but only after considering how many shares you need for the option pool and future rounds. The alternative method calculation explains the other side of the comparison.

Delaware LLCs pay a flat annual tax instead of the franchise tax formula, due June 1, so the assumed par value method applies only to corporations. Confirm the current amount and deadlines before you file.

Outside filers vary. Services that prepare the annual report and franchise tax filing can handle the calculation, and some also act as your Delaware registered agent, which is required. Confirm what's included and what they charge before you sign up.