My Delaware franchise taxes seem very high – how do I lower them?
Takeaway: The default way Delaware calculates franchise taxes yields a really high bill. There is an alternate way to calculate taxes (odd, right?) called the assumed par value method that results in a much lower bill - usually $400-$600 for startups.
Each year I get urgent emails from clients asking why their Delaware franchise taxes are so high (the initial bill can be in the tens of thousands of dollars). This is not something to worry about as Delaware allows companies to use an alternate method of calculating their franchise taxes, which results in very reasonable franchise taxes for startups. This alternate method is called the Assumed Par Value Capital Method. Here’s how it works.
Under the Assumed Par Value Capital Method, the franchise tax is calculated based on the assumed par value of the company’s authorized shares, rather than the actual par value.
To use the Assumed Par Value Capital Method, follow these steps:
Determine the company’s total authorized shares: This is the total number of shares (both Common Stock and Preferred Stock) that the company is authorized to issue.
Determine the company’s total gross assets: This includes all tangible and intangible assets owned by the company. Your accountant can assist with this.
Calculate the assumed par value per share: Divide the company’s total gross assets by its total authorized shares to determine the assumed par value per share.
Calculate the franchise tax: Multiply the assumed par value per share by the number of authorized shares, and then multiply that result by the applicable franchise tax rate. The current franchise tax rate in Delaware is $400 per $1,000,000 of assumed par value, up to a maximum of $200,000.
Here’s an example of how to use the Assumed Par Value Capital Method to calculate Delaware franchise taxes:
Assume that a company has 8,000,000 shares outstanding, 10,000,000 authorized shares and total gross assets of $1,000,000. To calculate the assumed par value per share, divide the total gross assets by the total issued shares:
$1,000,000 ÷ 8,000,000 shares = $0.125 per share
To calculate the franchise tax, multiply the assumed par value per share by the number of authorized shares, and then multiply that result by the franchise tax rate:
$0.125 per share x 10,000,000 shares = $1,250,000 assumed par value
$1,250,000 ÷ $1,000,000 = 1.25
400 x $1.25 = $500 franchise tax
In summary, the Assumed Par Value Capital Method is one common strategy used by startups to lower their Delaware franchise taxes. Companies should consult with legal and tax professionals to determine the best approach for their specific situation.