Delaware Franchise Tax Calculator

DE Franchise taxes are now due March 1st every year. Visit the Delaware Division of Corporation’s website to file

The vast majority of our startups use the Assumed Par Value Capital Method because it results it significantly less tax. The other method, the authorized share method, can result in a much higher tax calculation in most instances for early-stage companies.

Par value is the value per share. From the cap tables we’ve seen, the par value is usually set at $0.0001 or $0.00001. The par value has no connection to the market value of the share of stock.

For most VC backed startups, the par value will be listed in one or more of the following legal documents. (Make sure you work with experienced attorneys so they don’t mess up important items like par value!) Your lawyer may also have put your par value into your cap table software. 

Certificate of Incorporation (or Articles of Incorporation)

This foundational document is filed with the state to legally form the corporation. It often includes details about the classes of stock the corporation is authorized to issue, including the par value of each class. For VC-backed startups, it will specifically mention the par value of preferred shares. Any changes to these details typically require an amendment to the Certificate of Incorporation. Read here about how to find your Articles of Incorporation. 

Stock Purchase Agreement (SPA)

This agreement outlines the terms and conditions under which shares are sold and purchased. The par value of the preferred shares being transacted is usually specified here, along with other particulars like the issue price, number of shares, and payment terms.

Investor Rights Agreement

Although not as common, the Investor Rights Agreement may also make reference to the par value of preferred shares. This document outlines the rights of the investors, including anti-dilution protections and information rights, among others.

12/31/XX (most often)

Don’t panic - your Delaware Franchise Tax is likely so high because your accountant has used the wrong calculation method. Use the calculation method in our estimator above to estimate how much you likely owe. Your company will likely need to use the assumed par value calculation method instead of the authorized share method of calculation. 

We’ve outlined the most common reasons your Delaware Franchise Tax may be so high, including multiple issues and mistakes that companies often unwittingly make during the filing process. These range from the overstatement of assets and authorized shares to inaccuracies in the capitalization table. Unapproved payments or not fulfilling estimated tax obligations can also escalate your tax, as well as discrepancies in asset reporting. Failing to file multiple annual reports, or incorrectly calculating your tax based on a complex formula, can lead to more significant tax liabilities. Additional factors include late tax filings, incorrectly identifying your company type, and failing to maintain your Delaware Registered Agent. Understanding these common errors can help your startup navigate the complexities of Delaware Franchise Tax and avoid unexpectedly high bills. It’s always best to work with a qualified CPA who works with DE C-Corps to avoid these pitfalls - and to avoid paying way too much in taxes!

If DE sent your startup a huge tax bill for their annual franchise tax, don’t panic - you can likely reduce your Delaware Franchise Tax by using an alternative calculation method. We typically recommend calculating the franchise tax by using the assumed par value method, which our calculator above does, vs. the authorized share method. The authorized share method is generally Delaware’s tax team’s default method of calculating the franchise tax, and it can result in a much higher tax bill vs. the assumed par value method. Ask your accountant if you can use the assumed par value method to reduce your tax bill.

What other taxes do Delaware corporations need to file/pay?
 

Here is a partial list of taxes, other than the Delaware franchise tax, that startup corporations need to pay or file:

• Income Tax: Both federal and state tax forms are required for startups, even unprofitable ones.
• Gross Receipts Tax: A number of cities (such as San Francisco), will tax your Gross Revenue.
• Franchise Tax: The DE Franchise tax is the most well known, but a startup may also owe this tax if they do business in particular states (California being a common one).
• Payroll Tax: If you have employees, you have a payroll tax liability due regularly - do not mess this up, the cost and pain of fixing payroll tax issues is huge. 
• Sales Tax: Many states/counties/towns now levy sales tax on goods (and sometimes services) sold to customers in their jurisdictions - getting a software to manage this is a good idea. 
• Property Tax: Startups with significant property holdings, whether that be land, or even just computers/tables/chairs, you may be subject to property taxes. 
• Foreign Tax: If you have a foreign subsidiary or parent company, you might be subject to withholding tax, or FBAR/5471/5472 reporting. 

These filings get rejected due to two main reasons. The first is the use of virtual mailboxes, which Delaware does not accept because they require a physical address to know where your company is actually operating from. As a last resort, the CEO can list their personal address, but this is not ideal for everyone. The second reason is bad bank accounts, such as using the wrong bank account on tax filings or not informing your accountant of changes in bank accounts, which can delay tax filings and result in late fees. Learn more about why they get rejected here.