It's not actually a tax on income
Delaware franchise tax has nothing to do with revenue or profit. It's an annual fee for the privilege of being incorporated in Delaware, and it's owed whether the company made a dollar or lost a million. Every Delaware corporation pays it, due by March 1 each year, regardless of where the company actually operates.
Two calculation methods, wildly different results
- Authorized Shares Method (the default): Delaware calculates your bill based purely on how many shares your certificate of incorporation authorizes—not how many are actually issued. A typical startup authorizes 10 million shares to leave room for future issuances, and under this method that can produce a bill in the tens of thousands of dollars for a company with no revenue.
- Assumed Par Value Capital Method: This method instead looks at your total gross assets relative to issued shares, and for most early-stage startups produces a dramatically lower bill—often close to the $400 minimum.
Delaware calculates both methods and bills you for whichever is higher unless you elect otherwise. Almost every early-stage startup should be using the Assumed Par Value method, but it isn't the default that shows up on the notice.
How to actually fix it
You elect the Assumed Par Value method when you file your annual report, using your actual issued share count and total gross assets rather than accepting the pre-calculated number on the notice. This has to be done correctly and by the deadline—get the input numbers wrong and you can still end up overpaying even while using the right method.
What triggers a bigger bill later
A large authorized share count is normal and expected once you raise a priced round—investors expect room in the option pool and cap table for future dilution. The franchise tax exposure isn't a reason to avoid authorizing enough shares; it's a reason to make sure the Assumed Par Value election gets made correctly every single year, not just the first one.
Got a franchise tax bill that doesn't look right?
Nebo Legal reviews the calculation, makes sure the right method is elected, and keeps this from becoming an annual surprise.
Book a callFAQ
Is the franchise tax the same as Delaware income tax?
No. If your company doesn't operate in Delaware, you typically don't owe Delaware corporate income tax at all—franchise tax is separate and applies regardless of where you do business.
What happens if I don't pay on time?
Delaware charges penalties and interest, and the company can lose good standing, which becomes a problem the next time you're raising money or closing a deal and need a certificate of good standing.