If you incorporated in Delaware, you need to pay a Delaware Franchise Tax. The calculator below will help you estimate how much you’ll need to pay. The deadline is typically the last day of February - scroll down to access links to visit the Delaware Division of Corporations webpage where you can pay.
Caveat: The information on this page intended as general guidance for startups and it doesn’t substitute the need to work with a professional. Your company is unique; contact us for a free consultation.
If you incorporated in Delaware, yes, you need to file and pay the Delaware Franchise Tax. Most VC backed startups are Delaware C-Corps, which means that most VC-backed startups DO need to file.
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.
Most of our startups pay between $400 - $10,000 in DE Franchise taxes. Roughly, if you’ve raised $500k to $1M in venture funding, you are likely to owe between $500 to $1,000. If you’ve raised $10M in VC funding, you are going to owe closer to $4,000. If you’ve received a bill for $75K, it is because Delaware has calculated the tax using the Authorized Shares Method. Don’t freak out; recalculate using the Assumed Par Value Capital Method.
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.
12/31/XX (most often)
We often get the question, “why should my startup consider incorporating out-of-state and become a Delaware C-corp?”. Here are a few reasons why you would want to initially incorporate in Delaware.
Reasons Venture Capitalists Want Delaware C-Corps:
There are many things you must do after becoming a Delaware C-Corp. Click here to learn more.
Becoming a Delaware C-Corp is simple, but there is a lot of legwork. Our experts here at Kruze are happy to do it for you. Also at Kruze, another option is working with a PEO; that is how you “Incorporate in a state.” Hope that helps, thanks.
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.
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.
It’s important for founders to remember that the Delaware Franchise Tax website defaults to the largest tax bill possible when you first log into the site. That’s because the state of Delaware doen’t know how many outstanding shares you have or what your asset base is until you fill out that information. If you’re not working with an accounting firm, you’ll need to total up your asset base and enter that number. Then you need to hit the “recalculate” button and wait while the system generates a new balance. The new number will very likely be lower than the original number you saw.
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The Delaware Division of Corporations provides two methods to calculate Delaware franchise tax. The first method is based on the authorized share count, and VC-backed startups with option pools can quickly get to thousands of dollars in taxes due. The second method is the “assumed par value” method and is a more complicated formula based on shares issued and the company’s gross assets. This second method often results in lower tax bills for VC-backed startups.
If your young, unprofitable startup gets a letter stating that you owe a massive tax bill, contact your CPA - or us!