Delaware franchise tax, worked both ways
Northwind's charter through both methods: $85,165 on authorized shares, $400 on assumed par value capital, and why the notice shows the first.
Every Delaware corporation owes the franchise tax for the privilege of being one, whether or not it made money and wherever it operates. It's due with the annual report by March 1. There are two ways to compute it, and the company pays the lower, but only if it gives Delaware the figures the second method needs. Northwind's charter authorizes 10,000,000 shares at a par value of $0.00001, and the founders hold 8,000,000 of them. The two methods, the lower bill, and what to send Delaware to get it.
The authorized shares method counts the authorized shares, the ceiling the charter sets, not what anyone holds: $175 up to 5,000 shares, $250 up to 10,000, then $85 for every further 10,000 or part. It's what Delaware's notice shows. The assumed par value capital method starts from the balance sheet instead, the total assets on Schedule L of Form 1120, and taxes the result at $400 per $1,000,000 with a $400 minimum.
Authorized shares
- Good at
- Needs nothing but the charter.
- Minimum $175.
- Watch for
- Grows $85 for every 10,000 authorized shares, so a startup charter runs to five figures.
- Counts shares nobody holds — the option pool's reserve included.
- Best for
- A company that has authorized only a few thousand shares.
Assumed par value capital
- Good at
- Runs off the balance sheet, so it tracks what the company actually has.
- Delaware applies it when the figures are filed.
- Watch for
- Needs issued shares (treasury shares included) and gross assets from Schedule L.
- Minimum $400, more than the authorized shares minimum.
- Best for
- A startup with millions of authorized shares and modest gross assets.
Wrong
Pay the $85,165 on the notice.
Right
File the annual report with issued shares (8,000,000) and gross assets. Delaware computes $400.
The notice shows the authorized shares method because that's all Delaware can compute without your balance sheet. It isn't a bill you have to accept.
Delaware's notice is the authorized shares method. File issued shares and gross assets, and the assumed par value capital method usually brings a startup down to the minimum.
In this lesson: the two methods worked line by line on Northwind's charter, and how the tax is accrued and paid in the books.
Pages in this lesson
2 pages go deeper, about 10 minutes in all. Read them in order, or open the one you need.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Background reading explains; it is never the authority for a rule. Anything marked as a convention is ours, not the rule-maker's.
- State authority
- Delaware Division of Corporations — Annual Report and Tax Information (opens in a new tab)Due date, the $50 annual report fee, minimum and maximum tax, the $200 penalty and 1.5% monthly interestFree to read
- Delaware Division of Corporations — How to Calculate Franchise Taxes (opens in a new tab)The authorized shares method and the assumed par value capital method, step by stepFree to read
- 8 Del. C. §§501–510 (opens in a new tab)Delaware franchise tax — the annual report (§502), the rates (§503), proration (§503(d)), a void charter (§510)Free to read
- Background reading — not an authority
- Wikipedia, “Franchise tax” (opens in a new tab)A levy some US states charge businesses with a nexus in the stateFree to read
The words this lesson teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Delaware franchise taxThe annual tax every Delaware corporation owes for the privilege of being incorporated there, whether or not it does business or makes money there — the lower of the authorized shares method and the assumed par value capital method, minimum $175 or $400, maximum $200,000, due with a $50 annual report by March 1 and prorated in the first year
- Authorized shares methodThe default Delaware franchise tax calculation, from the number of shares the charter authorizes: $175 for 5,000 shares or fewer, $250 for 5,001 to 10,000, and $85 for each further 10,000 or part of 10,000, up to $200,000. It is what Delaware's notice computes, and for a startup with millions of authorized shares it runs to five figures
- Assumed par value capital methodThe alternative Delaware franchise tax calculation: assumed par (total gross assets ÷ issued shares) times authorized shares, taxed at $400 per $1,000,000, minimum $400 — usually far below the authorized shares method for a startup with millions of authorized shares
- Authorized sharesThe number of shares a corporation's certificate of incorporation permits it to issue — the ceiling, not what anyone holds. Issued shares are those actually sold or granted; the authorized shares method of the Delaware franchise tax counts the ceiling
- Large corporate filerA Delaware corporation with stock listed on a national securities exchange that reports consolidated gross revenues or assets of $750 million or more — it pays a flat $250,000 annual franchise tax instead of the $200,000 maximum
In the founder glossary
This lesson’s ideas, explained for the founder running the company. Each has an entry in the founder glossary.
See also
- Schedules, accruals & roll-forwardsEvery balance sheet account needs a schedule behind it, and the schedule has to tie to the GL. Most accounting products ship a ledger and statements and leave the schedules in spreadsheets. That handoff is where closes break.
- Journal entry for accrued expensesAt month-end, debit the expense and credit Accrued expenses for work received but not yet billed. Reverse the accrual on the first day of the next month, then book the vendor's bill as usual when it arrives.
- 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.
- ComplianceCalendarFiling deadlines by jurisdiction, with the owner and the date penalties start.