But I'm Not a Franchise...Why is Delaware Charging Me a Franchise Tax?

Mar. 01, 2018

For Delaware corporations, the franchise tax is the price you get to pay for the right to be registered as a Delaware corporation.  It has nothing at all to do with being a franchisee of a fast food chain. 

 

Every year on March 1st, all Delaware corporations must pay franchise taxes for the prior calendar year. Each corporation needs to file an online annual report with the Delaware Secretary of State. An officer of the company is required to fill out an online form while filing the report.

 

What information needs to be entered on the online form?

 

You need to confirm the following information:

 

  • Physical address of the corporation

  • Address of the registered agent   in Delaware

  • Names of all directors and one or more officers

  • Issued shares

  • Gross assets

 

How are franchise taxes calculated?

 

Your corporation’s annual franchise tax will be calculated automatically by the online form. There are two ways to calculate the taxes, one way that is usually much more expensive than the other.  If you fill in your company’s gross assets, then the form with use the Assumed Par Value method. If not, then the default calculation is the Authorized Share method.  Delaware has an excellent franchise tax calculator we recommend companies use before incorporating, increasing the number of authorized shares or issuing new shares.  https://corp.delaware.gov/taxcalc.shtml

 

Assumed Par Value Method. This calculation is the more complicated of the two methods, but usually results in a lower tax. It looks at the number of authorized shares, the number of issued shares, and the amount of gross assets. To calculate the franchise tax, this method multiples the par value for each share by the number of authorized shares, rounding up the answer to the nearest million dollars. The franchise tax is 0.035% of that number.

 

Assumed Par Value x Number of Authorized Shares = Round Up to Nearest Million.

then

Rounded Dollar Amount x 0.035% = Franchise Tax.

 

Because most companies set a very low par value when incorporating, Delaware created an “assumed par value” to prevent companies from paying an artificially low franchise tax. The higher of either the actual par value or the assumed par value is used for the franchise tax calculation above. Assumed par value is determined by dividing the company’s gross assets by all of its issued and outstanding shares.

 

 

Gross Assets ÷ (Issued + Outstanding Shares) = Assumed Par Value

 

 

Authorized Share Method. This method usually leads to a more expensive franchise tax than the Assumed Par Value method, because it is based on the number of shares a company has authorized, not the number of outstanding standing.

 

Authorized Share Franchise Tax Calculation

5,000 Shares or Less

$175

5,001-10,000 Shares

$250

Each Additional 10,000 Shares or Portion Thereof

Add $85

Maximum Annual Franchise Tax

$200,000

 

 

How to keep franchise taxes low.

 

A good rule of thumb is to have issued and outstanding shares equal to one third (1/3) to one half (1/2) of the authorized shares.  Also, set the initial number of authorized shares around 10-15 million.  Once you have significant gross assets, the formula will drive the assumed par value higher, resulting in higher taxes. 

 

How are franchise taxes paid?

 

Your company will pay its franchise taxes with a credit card. However, if you owe more than $5,000 in franchise taxes, you will be required to make quarterly tax payments at the end of the second month following each quarter. For example, a payment would be due on June 1st, September 1st, December 1st, and March 1st. Failure to pay a quarterly payment can lead to complications or delays in many transactions, and your company would no longer be in good standing with the state of Delaware.


Written By:
Todd Taylor

Todd helps business owners and their companies solve legal and business problems related to financing, startup, formation, shareholder disputes, contract drafting, negotiations, SEC compliance, company sales and purchases. No matter the situation, Todd helps his clients.

Emilee Walters is a second year law student at the St. Thomas School of Law. Emilee is an Avisen Fellow exploring a legal career in business law.

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