Relax - There are two ways to calculate your Delaware Franchise Taxes.
Relax – There are two ways to calculate your Delaware Franchise Taxes.  Image from Wikipedia Commons.

There are two ways to calculate your Delaware Franchise Tax.

Authorized Shares Method

The first way is the Authorized Share Method.  This method bases the Franchise Tax on a startup’s number of authorized shares.  Accordingly, if a startup has followed the industry standard of authorizing 10M shares, you will likely be shocked at the Franchise Tax due under this method.  Using Delaware’s Franchise Tax Calculator, you can see how this method yields a franchise tax most startup’s cannot afford.

Authorized Share Method

Fortunately, there is another method available, assuming you have entered a par value on your certificate of incorporation.

Assumed Par Value Method

Industry standard is to enter a par value of $.0001 or even $.00001.  “Par value” is the lowest price at which a company can sell its stock.  Accordingly, authorizing stock at a low par value makes sense for a startup so it can issue founders stock at a nominal price.  A low par value also makes sense as demonstrated by calculating the Franchise Tax of a company with a par value of $.00001:

Assumed Par Value Method

I’ve recently heard several attorneys cautioning against authorizing large numbers of common stock in Delaware because of the risk of incurring tens of thousands of dollars in Franchise Taxes.  This can be avoided.  If a company follows industry standard and enters a low par value on its Certificate of Incorporation it will avoid financial restrictions on the number of shares it can authorize.  Note that the minimal Assumed Par Value franchise tax of $350 is slightly higher than the minimal Authorized Share franchise tax of $75.  It’s also possible that the annual taxes in your home state may be slightly higher based on the number of authorized shares.  Nonetheless, the consequences will be minimal as compared to the scare you will receive when using Delaware’s Authorized Share method of calculating Franchise Taxes.