Franchise Tax Notice Sticker Shock

By Amy Fountain Monday, December 24, 2012

Does your company receive a large Franchise Tax bill from the state of Delaware every year?  Perhaps your company has more authorized shares than what it actually needs.

The state of Delaware bases the Franchise Tax bill on the total number of shares a company has authorized, so if your company has a significant amount of authorized shares, then you may be receiving a Franchise Tax notice that could give you sticker shock.

Here is the formula for how the state of Delaware calculates the amounts due under the Authorized Shares Method:

  • 5,000 shares or less (minimum tax) $75.00
  • 5,001 – 10,000 shares – $150.00
  • each additional 10,000 shares or portion thereof add $75.00
  • maximum annual tax is $180,000.00

For Example:

A corporation with 10,005 authorized shares pays $225.00 ($150.00 plus $75.00)
A corporation with 100,000 authorized shares pays $825.00 ($150.00 plus $675.00[$75.00 x 9])

A corporation with 1,000,000 authorized shares pays $7575.00 ($150.00 plus $7425.00 [$75.00 x 99])

As you can see, the Franchise Tax Fees are higher when a company has more authorized shares. Of course, you also have the option to file under the alternative method, which is called the Assumed Par Value Capital Method. This method uses a formula that takes into account the relationship between the authorized shares, issued shares, par value, gross assets, et al. Typically the amount of Franchise Tax Fees due under this alternative method are less than the amount due using the original method; however, this is not always the case. Additionally, using the alternative method requires you to provide all of these internal pieces of company information to the state of Delaware every year.

So is there an alternative option? Well, if your company currently has a large number of authorized shares, maybe the shares are no longer necessary. Perhaps the initial goal was to attract a large number of investors, which unfortunately did not happen. In situations where the current number of authorized shares is no longer effective for your company, consider filing a stock change amendment.

A stock change amendment is a document filed with the state of Delaware in order to modify the total number of shares a company has authorized. If your company currently has too many authorized shares and you do not want to keep receiving potentially outrageous annual Franchise Tax notices, then filing a stock change amendment may be a viable option for you.

By filing a stock change amendment, you can reduce your company’s total authorized shares to a minimum amount. For example, a company with only 1000 authorized shares currently pays a flat Franchise Tax Fee of only $125 per year ($75 Franchise Tax plus the $50 report fee).  Who wouldn’t want to pay less of an annual fee each year? In addition, it would be less hassle than having to provide several internal company details and trying to calculate the amount of the Franchise Tax Fee each year.

Harvard Business Services, Inc. can help you file a stock change amendment.  Simply contact our office and we will provide further information on how to proceed.

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