Question: One term that pops up this time of year is the Delaware Franchise Tax. Do I really need to pay it, or is it just another way for the system to squeeze us newbies?
Answer: Yes, if you are a Delaware C-Corp.
The good news is, the Delaware Franchise Tax isn't that bad, and for most startups it's relatively small. It's actually a yearly fee you pay to the state of Delaware for the privilege of having your company incorporated there. Think of it like a gym membership: you get access to certain benefits (like a prestigious address and flexible legal structure), and in return, you pay dues.
Now, whether you need to pay it depends. Here's the breakdown:
Who Pays:
How Much?
The fun part (not really): calculating the amount. Thankfully, it's not rocket science. Delaware offers two methods:
These two methods often yield a very different franchise tax. The good news is you can choose the lower amount to pay. In our experience, many clients authorize a lot of shares. Millions. Therefore the Authorized Shares Method, will calculate a very, very high tax bill. However, Delaware lets you choose the method that is more favorable to you. So most of our clients use the Assumed Par Value Capital method because it is based on the dollar amount of assets on the balance sheet.
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