Don’t Panic Over Franchise Taxes
David, help! Delaware says I owe almost $100,000 in corporation franchise taxes. I just started the company last year and I don’t know what is going on. Is this right?
First, don’t panic. You almost certainly do not owe much in franchise taxes. The Delaware Division of Revenue has a long and glorious history of causing heart attacks among unsuspecting startup entrepreneurs every year.
Delaware’s default method for calculating franchise taxes is based upon your total authorized shares. Even in the beginning, many startups have 10-20 million authorized shares, so the taxes computed by the default method are eye popping.
You should instead use the Assumed Par Value method, which looks at your total gross assets, total authorized shares, and total issued shares. I can outline the formula, or you can just use the online calculator your registered agent usually provides by filling in the information or have your law firm do it. The amount owed will recalculate for you. The actual number is usually a few hundred dollars.
And please do not forget to file your annual report with Delaware and your annual franchise taxes in California if you are located here. We will cover all of these requirements in the incorporation course in a few weeks.