What it means
Delaware charges every stock corporation formed there an annual franchise tax, a fee for the privilege of being a Delaware corporation. It isn't based on profit, so a company with no revenue still owes it. It's filed with an annual report listing the company's directors, officers and address, and both are due March 1.
There are two ways to calculate the tax, and you pay the lower result. The authorized shares method looks only at how many shares your certificate of incorporation allows: $250 for up to 10,000 shares, plus $85 for each further 10,000 or part of it. Ten million authorized shares comes to $85,165.
The assumed par value capital method divides total gross assets by issued shares to get an assumed par, multiplies that by authorized shares (using the stated par where it's higher), and charges $400 for each $1 million of the result or part of one, with a $400 minimum. Both methods cap at $200,000, or $250,000 for large filers. Delaware's notice uses the first method, so you run the second yourself when you file.
At December 31 Acme has 10,000,000 authorized shares at $0.00001 par, 8,000,000 issued, and $600,000 of total gross assets. Assumed par is $600,000 ÷ 8,000,000 = $0.075. Times 10,000,000 authorized shares, that's $750,000 of assumed par value capital. The rate is $400 for each $1 million or part of one, so $750,000 is charged $400, which is also the minimum. With the $50 annual report fee Acme owes $450, accrued as an expense of the year.
In February Acme files the annual report online, enters its gross assets and issued shares, pays the $450 and clears the accrual. Paying the $85,165 authorized shares figure without recalculating would have cost almost 190 times as much.
Total gross assets is the same figure that goes on Schedule L of Form 1120, so a closed year-end balance sheet comes first. Missing March 1 brings a $200 penalty and 1.5% monthly interest on unpaid tax, and it can put the company out of good standing, which banks and investors check.
Why it matters. Delaware's notice is calculated on authorized shares, which for a startup with ten million authorized shares is $85,165. The assumed par value capital method, run from your balance sheet, is often a few hundred dollars.
Try it with your numbers
Change any number. The working below updates as you type.
Authorized shares: $175 to 5,000 shares, $250 to 10,000, +$85 per further 10,000 · Assumed par value capital: $400 per $1,000,000 (min $400) · Max $200,000 · Pay the lower, plus the $50 annual report feeFrom your certificate of incorporation.
Total assets from Form 1120, Schedule L.
Tax plus annual report fee
$450.00
How it’s worked out
- 1Authorized shares method$250.00 + 999 × $85.00 (each 10,000 shares or part above 10,000)$85,165.00
- 2Assumed par$500,000.00 ÷ 8,000,000 shares, to 6 decimals$0.062500
- 3Assumed par value capitalPar $0.00001 is below assumed par, so 10,000,000 × $0.062500$625,000.00
- 4Assumed par value capital method$625,000.00 ÷ $1,000,000 × $400.00 = $250.00, raised to the $400.00 minimum$400.00
- 5Lower of the twoAssumed par value capital method$400.00
- 6Total due by March 1$400.00 + $50.00 annual report fee$450.00
Filing with the assumed par value capital method saves $84,765.00 against the authorized shares bill Delaware sends. One class of par stock; with no-par stock the authorized shares method is always lower. Large corporate filers pay a flat $250,000. Tax of $5,000 or more is paid in installments (40% June 1, 20% Sept 1, 20% Dec 1, rest March 1). A late report costs $200 plus 1.5% a month interest on unpaid tax. Mid-year changes to the share structure are prorated.
The entry, worked
At December 31, Acme has 10,000,000 authorized shares, 8,000,000 issued and $600,000 of total gross assets. The assumed par value capital method gives the $400 minimum tax; with the $50 annual report fee it owes $450 by March 1.
| Account | Debit | Credit |
|---|---|---|
| Taxes and licenses expense | $450.00 | |
| Accrued taxes | $450.00 | |
| Total | $450.00 | $450.00 |
The year the tax relates to carries the cost, even though Acme pays it the following March.
Common questions
Why is my Delaware franchise tax bill so high?
Delaware's assessment is based on authorized shares, and that method gets expensive fast for a startup with millions of authorized shares. The assumed par value capital method often comes out far lower, and you pay whichever is less.
What does the assumed par value capital method need?
Your total gross assets, which is the total assets figure on Schedule L of your federal return, plus your issued shares, authorized shares and par value.
Does a Delaware LLC pay the same franchise tax?
No. A Delaware LLC or LP pays a flat $300 annual tax, due June 1, and files no annual report.
Where it comes up
The glossary entries, founder guides and lessons on this site that use the term and link here.
- First-year compliance calendar for a Delaware C-corpDelaware franchise tax, 1099s, the federal return, payroll filings, state annual reports and sales tax: the deadlines a young C-corp misses most, by month.Guide · 5 min
- Startup tax deadlines by month for a C-corpFederal tax deadlines for a calendar-year C-corp, month by month: W-2s, 1099s, Form 941, Form 1120, estimated taxes and Delaware franchise tax.Guide · 5 min
Read further
General information for US companies, not tax, legal or accounting advice. Check the specifics with a CPA before you act on them.