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.
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!
Let’s breakdown the two methods to calculate this tax: the “Authorized Shares Method” and the “Assumed Par Value Capital Method.”
This is the simpler of the two methods - it’s just based on the number of authorized shares a company has (which can be quite high for many VC-backed startups!!!) The Authorized Shares Method is also the default way Delaware will calculate your franchise tax, and it can result in some very, very high tax bills for VC-backed startups that have a lot of shares. The calculation is based solely on the number of authorized shares your corporation has. Here’s how it works:
The minimum tax for companies using the Authorized Shares Method is $175, and the maximum annual tax is $200,000. We’ve seen startups get a huge tax bill when this calculation method is used; let’s do an example of a typical, venture backed startup.
An Example of the Authorized Shares Method
Let’s assume that a startup has 20,000,000 shares outstanding - not inconceivable for an early-stage, VC backed company. For the first 10,000 shares they will pay $250. Then, for the next 19,990,000 shares they pay $85 per 10,000 shares, which is 1999*$85. So their total is:
$170,165 = $250 (first 10,000 shares) + $169,951 (19,990,000 shares / 10,000 x $85)
Note that a single additional authorized share will cause this startup to pay an extra $85. Not a cheap share, but the even more expensive thing is using the Authorized Shares Method to calculate the Delaware Franchise Tax instead of using the Assumed Par Value Capital Method, which yields a lower bill for most early-stage, funded businesses.
This method is a bit more complicated and involves multiple variables, including the total gross assets, total shares issued, and total authorized shares by class with their respective par values. Basically, a company pays $400 per million dollars of par value, but the way par value gets calculated is a bit complex.
Most VC backed startups will have very low par value shares, meaning that you’ll end up using the assumed par value in the franchise tax calculation. So step 1 in the directions below is what you’ll multiply against your total number of shares, then you divide by 400/1,000,000 to get to what you owe.
Note that this is a very, very high level explanation. Really, use the calculator above and make sure to consult with a tax professional who works with a lot of Delaware corporations! Directly from the Delaware Division of Corporations’ website:
The minimum payment using the Assumed Par Value Capital method is $400, and there is no maximum.
Understanding the Delaware franchise tax deadlines is crucial for all incorporated businesses, especially for VC-backed startups operating as C-Corps. At Kruze, our CPA firm specializes in serving these dynamic entities, ensuring they navigate their tax obligations seamlessly.
For C-Corporations, including VC-backed startups that Kruze proudly serves, the Delaware franchise tax and annual report filings are due by March 1st every year. It’s a critical deadline that these corporations must meet to avoid incurring late fees. Alongside their tax payments, corporations are also required to pay a $50 filing fee for their annual reports. This fee is a small but essential part of maintaining compliance with Delaware’s corporate regulations.
While our focus at Kruze is on C-Corps, it’s worth noting that Delaware has different requirements for other business structures. Limited Liability Companies (LLCs), Limited Partnerships (LPs), and General Partnerships face a June 1st deadline for their annual tax payments. Learn more about this deadline on Delaware’s tax website.
All entities should be aware of the penalties for late payments. Missing the due dates results in a $200 penalty, with interest on the overdue amount (including the penalty) accruing at 1.5% per month. This can significantly increase the financial burden for businesses that delay their payments.
Kruze has an entire, interactive and downloadable calendar of C-Corp tax deadlines - get it here!
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.
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)
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.
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.
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.
Here is a partial list of taxes, other than the Delaware franchise tax, that startup corporations need to pay or file:
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.
Important Tax Dates for Startups