Delaware sent you a bill. You probably do not have to pay all of it.
Delaware defaults to the most expensive calculation method on every franchise tax bill it sends out. Here is what that means, why it happens, and how to fix it before you file.
Every Delaware corporation owes franchise tax every year, regardless of whether it has made a single dollar of revenue. Miss the deadline and you lose good standing. Pay without thinking and you may be handing Delaware tens of thousands of dollars more than you actually owe.
The reason this happens is straightforward: Delaware defaults to the most expensive calculation method on every bill it sends out, and it does not volunteer the fact that a cheaper method exists. Most founders pay the default bill, assume it is correct, and move on. It is one of the single most common and costly mistakes in early-stage company administration.
This guide explains what the Delaware franchise tax actually is, how the two calculation methods work, and what to do to make sure you are not overpaying.
What the Delaware franchise tax actually is
The Delaware franchise tax is not an income tax and not a revenue tax. It is an annual fee Delaware charges for the privilege of being incorporated in the state. It has nothing to do with how much money your company made, or whether it made anything at all.
Every Delaware C-Corp and S-Corp owes it every year. Delaware LLCs and LPs owe a flat $300 annual tax, but unlike corporations they do not file an annual report alongside it. The $300 is simply due by June 1 each year, and late filing triggers penalties even on that flat amount.
For corporations, the franchise tax is variable and calculated using one of two methods. This is where most of the confusion, and most of the overpayment, happens.
The two calculation methods for C-Corps, and why the default is a problem
Delaware provides two methods for calculating franchise tax for corporations. It defaults to the Authorized Shares Method on every bill it generates, which is almost always the more expensive option for startups and growth-stage companies.
Authorized Shares Method (the default)
This method calculates tax based on the total number of shares your company has authorized, not the number actually issued. The tiered structure works as follows: 1 to 5,000 shares costs $175; 5,001 to 10,000 shares costs $250; every additional 10,000 shares above that adds $85.
The problem is that most venture-backed startups authorize millions of shares from day one to accommodate future fundraising and option pools. A company with 10,000,000 authorized shares can receive a franchise tax bill of over $170,000 under this method. The minimum tax is $175 and the maximum is $200,000.
Assumed Par Value Capital Method (almost always cheaper)
This method calculates tax based on your company’s capital and assets rather than its share count. It requires three inputs: total gross assets from your balance sheet, total issued shares, and total authorized shares.
The formula works as follows. Divide total gross assets by total issued shares to get the assumed par value per share. Multiply that by total authorized shares to get the assumed par value capital. Divide by one million, round up to the next million, and multiply by $400.
A startup with $1,000,000 in gross assets, 10,000,000 issued shares, and 10,000,000 authorized shares would pay $400 in franchise tax plus the $50 annual report fee, totaling $450. The same company under the Authorized Shares Method would owe over $170,000.
The worked example that makes the stakes clear
Consider a seed-funded startup with 10,000,000 authorized shares, 2,000,000 issued shares, and $2,000,000 in total gross assets.
Under the Authorized Shares Method: $170,215. Under the Assumed Par Value Capital Method: $4,050. The saving from using the correct method: approximately $166,000.
Delaware will not tell you this. You have to know to switch.
What counts as gross assets
Total gross assets for the Assumed Par Value Capital Method comes directly from Schedule L of your federal tax return, Form 1120. It is the total assets figure on your balance sheet and includes cash, accounts receivable, equipment, prepaid expenses, and all other balance sheet assets.
Cash from a funding round counts as a gross asset. A large seed round increases your total gross assets and therefore increases your franchise tax bill under the Assumed Par Value Method. Even so, it almost always produces a significantly lower bill than the Authorized Shares Method. No deductions or adjustments are available to reduce the gross assets figure for this calculation.
Deadlines and what happens if you miss them
C-Corps must file their annual report and pay franchise tax by March 1 each year. Delaware LLCs and LPs must pay their flat $300 tax by June 1.
Missing the deadline triggers a $200 flat penalty plus 1.5% monthly interest on the unpaid tax. More importantly, it puts your company in a status of not being in good standing with Delaware. In practice this matters more than most founders expect: investors require proof of good standing before closing a round, banks can freeze or refuse accounts, and registering as a foreign entity in other states typically requires a good standing certificate. Missing the deadline by even a few days triggers the $200 penalty, so this date should be treated as non-negotiable.
How to actually file
Delaware franchise tax is filed entirely online through the Division of Corporations portal at corp.delaware.gov. Domestic corporations are expected to file online and paper filing is not used in practice.
Before you sit down to file, have the following ready. This preparation step is the single most common source of errors and delays, and getting it wrong can result in an incorrect tax calculation that costs you money:
- Your 7-digit Business Entity File Number, which appears on any Delaware notice or can be found through the entity search on the Division of Corporations website
- Your registered agent name and address
- Director and officer names and addresses
- Authorized share capital, including number of shares and par value
- Balance sheet data if you are using the Assumed Par Value Capital Method, specifically total gross assets and total issued shares
During the online filing process, you will see a franchise tax calculation screen. Delaware defaults to the Authorized Shares Method. To switch to the Assumed Par Value Capital Method, enter your total gross assets, total issued shares, and total authorized shares. The system will recalculate your bill. This is the step most founders miss, and it is the one that determines whether you pay the correct amount or dramatically overpay.
Founders with simple capital structures can typically file without an accountant. Companies with multiple share classes, preferred stock, or complex cap tables benefit from having an accountant review the inputs before filing.
What to do if you have missed filings
If you have missed one or more years of Delaware franchise tax filings, the process to catch up requires filing all missed annual reports and paying all back franchise tax, penalties, and interest. Penalties compound monthly at 1.5%, so the longer the delay, the more expensive the resolution.
Delaware does not offer a formal voluntary disclosure or penalty waiver program for franchise tax in the way some states do for income tax. Payment in full is typically required to restore good standing. Once all back payments are made, good standing is restored retroactively.
If you are approaching a fundraising process or a transaction and discover missed filings, address them immediately. Investors and acquirers will find them in due diligence, and resolving them under time pressure is more expensive and more stressful than doing it proactively.
Common mistakes worth avoiding
Paying the default Authorized Shares Method bill without questioning it is the most expensive mistake on this list, and the most common. The others are worth knowing too.
Missing the March 1 deadline because the company has zero revenue and the founder assumes nothing is owed. The franchise tax is owed regardless of revenue or activity, and the penalty for missing the deadline does not care whether your company is pre-revenue.
Confusing franchise tax with income tax. They are completely separate obligations. A company that owes no income tax because it is unprofitable still owes franchise tax.
Not updating share information correctly in the annual report. Incorrect share data produces an incorrect tax calculation, which can result in either an overpayment or an underpayment that triggers penalties later.
Assuming an LLC does not need to act because it only owes $300. The $300 is still due by June 1, and missing it triggers the same penalty structure.
Frequently asked questions
Does a Delaware company owe franchise tax if it has no revenue? Yes. The Delaware franchise tax is owed every year regardless of revenue, profitability, or business activity. Even a pre-revenue company that has never made a dollar owes franchise tax from the year it was incorporated.
What is the difference between the Authorized Shares Method and the Assumed Par Value Capital Method? The Authorized Shares Method calculates tax based on the total number of shares your company has authorized. The Assumed Par Value Capital Method calculates tax based on your company’s total gross assets and issued shares. For most startups with large authorized share counts and relatively modest assets, the Assumed Par Value Capital Method produces a dramatically lower bill. Delaware defaults to the Authorized Shares Method, so you must actively switch during filing.
Does a Delaware LLC file an annual report? No. Delaware LLCs do not file an annual report. They only pay a flat $300 annual tax, due by June 1 each year. This is different from corporations, which must both file an annual report and pay franchise tax by March 1.
What happens if I miss the Delaware franchise tax deadline? A $200 flat penalty applies immediately, plus 1.5% monthly interest on the unpaid tax. Your company is also placed in a status of not being in good standing with Delaware, which affects fundraising, banking, and registering in other states.
Does cash from a funding round increase my Delaware franchise tax? Under the Assumed Par Value Capital Method, yes. Cash from a funding round increases your total gross assets, which increases the franchise tax calculation. However, even with a significant seed round on the balance sheet, the Assumed Par Value Capital Method almost always produces a lower bill than the Authorized Shares Method.
Can I file the Delaware franchise tax myself without an accountant? Yes, for simple capital structures. The online filing process at corp.delaware.gov is straightforward if you have your Business Entity File Number and balance sheet data ready. Companies with multiple share classes, preferred stock, or complex cap tables benefit from accountant review to ensure the inputs are correct.
What is the maximum Delaware franchise tax a corporation can owe? Under the Authorized Shares Method, the maximum is $200,000 per year. Under the Assumed Par Value Capital Method, there is no stated cap, but in practice the calculation produces much lower bills for most early-stage companies.
How do I restore good standing after missing filings? File all missed annual reports and pay all back franchise tax, penalties, and interest in full. Delaware does not offer a penalty waiver program for franchise tax. Good standing is restored once all payments are made.
Delaware franchise tax is one of those obligations that is easy to get wrong and expensive to fix. If you are unsure whether you are calculating it correctly, have missed filings to catch up on, or want a second opinion before you file, Numera can help you work through it quickly and make sure you are not leaving money on the table.