Once you’ve registered your company in Delaware, you may receive an alarming letter—or email—from the Delaware Division of Revenue outlining your tax responsibilities. Don’t panic, all companies incorporated in Delaware get one!
As a Delaware C Corp startup, It’s more than likely that the predictions in your alarming letter are based on the Authorized Shares Method, which most companies (especially startups like yours) don’t use to calculate their tax liability in the state. Luckily, you won’t have to take a deep dive into accounting to use the alternate method, the Assumed Par Value Capital Method, used by most Delaware corporations.
Calculating Your Delaware Tax Payment
The Authorized Shares Method
Delaware’s default method (the one in your letter) of calculating annual franchise tax is based exclusively on how many shares have been authorized in the company charter. For the minimum, 5,000 shares or less, tax is $175.00, but if you use this method, your Delaware tax payment will likely look much higher.
For between 5,001-10,000 shares, it’s $250.00. Each additional 10,000 shares or portion is an additional $75.00. The total annual maximum tax is capped at $180,000.00. It may seem like a bargain, but costs can add up astonishingly quickly—which is why companies seldom use this method.
The Assumed Par Value Capital Method
To calculate your Delaware corporate tax via this approach, divide your firm’s total gross assets by the total number of issued shares. Multiply this figure—your assumed par value—by your total number of authorized shares, which provides your assumed par value capital.
The tax is $350 for each $1,000,000 of assumed par value capital (shares), rounding up to the next million if the figures is over $1 million, plus a $50 filing fee for the required annual report.
Our default assumption at Capbase is that new startups should authorize 10 million shares of stock with a par value of $0.01. If a new startup has gross assets of less than $1.0 million, 10,000 issued shares and 10 million total authorized shares, the Assumed Par Value Capital Method would result in an annual franchise tax of only $400.
Essentially a flat rate levied for the privilege of doing business in Delaware, this serves to maintain your company's good standing in the state. Correctly calculated, Delaware’s franchise tax is amongst the lowest in the country for most companies and is an easy-to-justify piece of your incorporation costs.
With a Delaware incorporation, even if you do need to register and pay taxes in two states and your launch capital is low, the tax liability created by additionally registering in Delaware is a burden that nearly all companies can afford to bear.
- A minimum corporate tax is one of the advantages of forming a corporation in Delaware.
- New Delaware state corps will receive a letter from the state regarding tax liability.
- The state’s default method of determining liability is often far higher than your responsibility according to the AMT (Alternative Minimum Tax).
- Most startups calculate their liability using the Assumed Par Value Capital Method.
- Tax liability can be very low using this method.
- New companies without external funding can usually afford Delaware Franchise Tax, which could be as low as $400 using AMT calculations.