Question: One term that pops up this time of year is the “Delaware Franchise Tax.” Do I really need to pay it, or is it just another way for the system to squeeze us newbies?

Answer: Yes, if you are a Delaware C-Corp.

The good news is, the Delaware Franchise Tax isn’t that bad, and for most startups it’s relatively small. It’s actually a yearly fee you pay to the state of Delaware for the privilege of having your company incorporated there. Think of it like a gym membership: you get access to certain benefits (like a prestigious address and flexible legal structure), and in return, you pay dues.

Now, whether you need to pay it depends. Here’s the breakdown:

Who Pays:

  • Delaware C-Corporations: If you incorporated your tech startup in Delaware as a C-Corp (common for venture-backed companies), then yes, you’ll likely pay the franchise tax.
  • Other Entities: LLCs, non-profits, and certain other business types have different rules. Check with your lawyer or accountant for specifics.

How Much?

The fun part (not really): calculating the amount. Thankfully, it’s not rocket science. Delaware offers two methods:

  1. Authorized Shares Method: This is based on the maximum number of shares your company can issue, not how many you’ve actually sold. It’s pretty straightforward, with fees ranging from $175 for small companies to $200,000 for giants.
  2. Assumed Par Value Capital Method: This uses a hypothetical value assigned to each share. It can be more complex but might save you money.

These two methods often yield a very different franchise tax. The good news is you can choose the lower amount to pay. In our experience, many clients authorize a lot of shares. Millions. Therefore the Authorized Shares Method, will calculate a very, very high tax bill. However, Delaware lets you choose the method that is more favorable to you. So most of our clients use the Assumed Par Value Capital method because it is based on the dollar amount of assets on the balance sheet.

Main Takeaway:

  • Delaware Franchise Tax applies to Delaware C-Corps (but not all business types).
  • Cost depends on the number of authorized shares or assumed par value.
  • File an annual report alongside paying the tax. These are due by March 1.
  • Most early-stage startups will use Assumed par Value Capital Method.
  • Consult a tax advisor for personalized guidance.