Every year at tax time, early stage startup founders across the country experience the “Delaware Freakout.” They open their Delaware Franchise Tax bill and are shocked to see a bill of $75,175 or some other equally ridiculous number. How could a tiny startup owe that much in taxes?
If this is you, don’t panic. The Delaware Freakout is a phenomenon where some startup founders or executives receive their first Delaware franchise tax bill and are taken aback by the amount they owe. This can be particularly surprising for companies that are pre-revenue or have only recently raised funding, as they may not have expected such a large expense. In some cases, the franchise tax bill can even exceed the company’s available cash balance.
This article will explain the Delaware Franchise Tax and how changing the method of calculation can save you $74,825.
Authorized Share Method
The Authorized Share Method calculates the franchise tax based on the total number of authorized shares according to the following schedule:
- 1 – 5,000 shares: $175
- 5,001 – 10,000 shares: $250
- Each additional 10,000 shares or portion thereof: $75
The maximum tax is $180,000.
You can simply plug in the number of authorized shares into this Excel sheet, and you’ll see the amount owed.
Assumed Par Value Capital Method
The Assumed Par Value Capital Method creates an assumed par value for your shares based on the total assets of the company, number of issued shares, number of authorized shares and the par value.
Examples of Delaware Franchise Tax Based on the Two Methods of Calculation
Let’s assume our startup Gregarious Games Inc. authorized 10 million shares and has issued 8 million at a par value of $0.00001. It currently has $800K of gross assets. What does the startup owe based on the two methods?
- Authorized Share Method – $75,175
- Assumed Par Value Capital Method – $350
The Assumed Par Value Capital Method saves your startup $74,825.
In conclusion, if you’re an early stage startup, talk to your accountant about using the Assumed Par Value Capital Method, it could save you some serious money.