Using the Delaware Franchise Tax Calculator
When clients are thinking about forming Delaware Corporations, one of the most important decisions to make is how many total Authorized Shares of Stock the Corporation will have along with the Par Value of the Shares. This information is listed on the Delaware Certificate of Incorporation filed in Delaware. And one of the most popular questions we receive daily is how many shares of stock should I start my Corporation with? Should I start with 1,500 shares or 10,000,000 shares? This is a great question as it truly depends on certain factors and will influence your company’s Delaware Franchise Tax owed each year.
Delaware Franchise Tax is based on a Corporation’s total Authorized Shares. A company with 1 to 5,000 authorized shares is assessed a flat rate of $225 franchise tax; a company with 5,001-10,000 authorized shares is assessed $300 franchise tax; and a company with 10,001 shares or more will be assessed a minimum of $450 franchise tax. Delaware Franchise Tax is due by March 1st of each year.
Some clients that form Corporations in Delaware may be working with a limited budget, or perhaps clients may not envision having investors at the time of the initial formation since there may be many other goals left to accomplish, first. They may decide to start with a minimum stock structure which is 1 to 5,000 shares of stock. With this stock structure, the Delaware Corporation will pay a $225 Delaware Franchise Tax each year which includes the annual report fee. This will allow for the lowest annual fees which is sometimes beneficial for bootstrapped start-up companies. But what if you plan to bring aboard investors in the future and the need for more authorized shares is required? This is quite common. If the need arises, a Stock Amendment can be filed with the state for approval to increase the number of authorized shares of the Corporation.
For example, a client may form a Delaware Corporation with 1,500 shares at the time of the initial formation because he or she may be the only person within the entity from the start. Perhaps, this client sets a goal to bring aboard a specific number of investors in the future or maybe they begin obtaining more investors within 3 to 5 years. At this point, sometimes, clients may decide to increase their total authorized shares. Typically, when looking to bring on investors, we often see clients amend the Certificate of Incorporation to reflect 1 million or 10 million shares. If an Amendment is filed to increase the shares, the question would then become, what will be my Delaware Franchise Tax each year? A company with 10,001 shares or more will be assessed a minimum of $450 franchise tax. The next question is typically, why does it state, minimum?
For those that form or have Delaware Corporations with 10,001 shares of stock or more, they may be alarmed as to the amount of Franchise Tax their entity may owe in Delaware based on their stock structure. To mitigate this specific concern, we offer a very helpful tool, a Delaware Franchise Tax Calculator that many of our clients utilize. This Franchise Tax Calculator helps to tally the lowest possible Franchise Tax that may be owed using the Assumed Par Value Capital Method. We will ask for the total amount of issued shares and the total gross assets to assist with this calculation. Below is an example:
ABC Inc. is a General Corporation with 15,000,000 Shares of Common Stock and their Franchise Tax Bill may list the entity owing thousands of dollars. However, using the Franchise Tax Calculator and Assumed Par Value Method, the Franchise Tax owed may be decreased as follows:
To Use the Franchise Tax Calculator:
-Select the Entity Type in the dropdown menu (This would be Corporations: General, Close, Public Benefit)
-Enter the Total Number of Authorized Shares the Corporation has: Enter 15,000,000
-Enter the Par Value of the Shares: An example could be $0.001
2 More Line Items Should Appear after the above information is entered:
-Enter the Total Number of Issued Shares that have been issued to shareholders: An example can be 5,000,000
-Enter the Total Gross Assets: (This is the "total assets" reported on the U.S. Form 1120, Schedule L (Federal Return) relative to the company's fiscal year ending the calendar year of the report) An example can be $300,000.
Once these details are entered; the Estimated Tax Using the Assumed Par Value Method will show $400 based on the numbers listed above meaning the actual Franchise Tax owed is $450 which includes the $50 Annual Report Fee as opposed to $127,665.00 (Authorized Shares Method).
It’s important to note that while the Delaware Franchise Tax is often times calculated to the minimum payment of $450 (including the Annual Report Fee) for a Corporation with 10,001 shares of stock or more, that the amount truly depends on the total number of issued shares of stock and the total gross assets. For example, above, if I had listed 5,000,000 shares were issued and the total gross assets were $500,000, the Delaware Franchise Tax owed using the Assumed Par Value Method would be $800 plus the $50 Annual Report fee as opposed to $127,665.00.
If you have any questions regarding this process or need assistance, we can be reached at 1-302-645-7400 or 1-800-345-2677 ext. 6900 or via email at info@delawareinc.com. We can also be reached via skype at delawareinc.
*Disclaimer*: Harvard Business Services, Inc. is neither a law firm nor an accounting firm and, even in cases where the author is an attorney, or a tax professional, nothing in this article constitutes legal or tax advice. This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances. Any action taken or not taken based on this article is at your own risk. If an article cites or provides a link to third-party sources or websites, Harvard Business Services, Inc. is not responsible for and makes no representations regarding such source’s content or accuracy. Opinions expressed in this article do not necessarily reflect those of Harvard Business Services, Inc.
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There are 2 comments left for Using the Delaware Franchise Tax Calculator
David Myth said: Wednesday, October 4, 2023Great article! Keep up the good work and informing people about usage of tax calculators!
C Derrell said: Saturday, March 5, 2022Just want to highlight that Justin Damiani is one of the BEST customer support reps I have ever interfaced with. He knows his business, and he is pleasant and prompt. You could do a lot worse than sending him an email to get your business started & sorted with HBS.
HBS Staff replied: Monday, March 14, 2022Thank you for those kind words on Justin. We take great pride on our customer support. Justin is just one of the many great people we have here at Harvard and we are all ready to assist. We wish you much success.