Key Takeaways
- Delaware franchise tax is not an income tax; it is an annual fee for the privilege of maintaining a Delaware corporation in good standing.
- Delaware corporations can calculate franchise tax using two different methods: the Authorized Shares Method or the Assumed Par Value Capital Method.
- Many companies mistakenly default to the Authorized Shares Method, which can produce a significantly higher tax when a corporation has authorized a large number of shares.
- The Assumed Par Value Capital Method, which considers issued shares and total gross assets, often results in a lower tax for companies with high authorized share counts but modest assets.
- Businesses incorporated in Delaware should run both calculations each year to ensure they are paying the lowest applicable franchise tax while remaining compliant.
Many Georgia-based companies form or register entities in Delaware, especially those planning to raise capital, issue equity broadly, or scale across state lines. Delaware is, in many ways, the default jurisdiction for corporate formation in the U.S. But with that choice comes an annual compliance item that catches a lot of businesses off guard: Delaware franchise tax.
The problem isn’t that the Delaware franchise tax exists. It’s that many companies calculate it using a method that produces a much higher bill than necessary, when Delaware provides an alternative method that often results in a lower tax.
Why do companies incorporate in Delaware in the first place?
Delaware’s appeal isn’t a mystery; it’s infrastructure. Delaware’s corporate statute (the Delaware General Corporation Law) is designed to be enabling and flexible, and it’s updated regularly. That predictability and stability are one reason Delaware remains a common choice for incorporations.
Delaware is also known for its specialized business court system, particularly the Court of Chancery and the extensive body of corporate case law that has developed over time, something Delaware itself highlights as a key driver of its popularity as an incorporation state.
What is the Delaware franchise tax?
Delaware franchise tax is not an income tax. It’s a state-level annual tax/fee assessed on entities for the privilege of being incorporated (or otherwise established) in Delaware and staying in good standing.
For Delaware corporations, franchise tax is calculated annually with minimums and maximums that Delaware publishes, and corporations file an annual report and pay the tax through Delaware’s Division of Corporations. (Separately, Delaware LLCs/LPs/GPs generally pay a flat annual tax and do not file the same annual franchise tax report as corporations.)
Because many businesses that choose Delaware are corporations (including startups that authorize large numbers of shares), the calculation method becomes the difference between a manageable annual cost and an avoidable overpayment.
The two methods Delaware allows for corporations
Delaware provides two ways to compute franchise tax for corporations:
- Authorized Shares Method: This method is primarily based on the number of shares the corporation has authorized in its charter. Delaware lists a minimum tax of $175 when using the Authorized Shares Method (with a maximum that can be much higher depending on filing status).
Where companies go wrong: Many businesses default to this method without realizing that authorizing a high share count (common for venture-backed or equity-heavy structures) can inflate the tax, even if the company has limited assets or modest activity.
- Assumed Par Value Capital Method: This method uses a different foundation: issued shares and total gross assets. Delaware’s own calculation guidance walks through the steps and ties “total gross assets” to the “total assets” shown on the company’s U.S. federal return (Form 1120, Schedule L). Delaware’s published minimum tax for this method is $400.
Why it often helps: Companies that authorize many shares but have relatively low gross assets (or relatively few issued shares compared to authorized shares) often see a significantly lower tax under the assumed par value approach than under the authorized shares approach.
| Method | What it primarily looks at | Why it can over/understate tax |
| Authorized Shares Method | Authorized share count | Can be expensive for companies with high authorized shares even if assets are modest |
| Assumed Par Value Capital Method | Issued shares + total gross assets | Often more proportional to the company’s actual financial profile |
Which method is “best” to use?
Here’s the practical answer: the best method is the one that results in the lower tax based on your actual numbers, and the method that many companies should at least test is the Assumed Par Value Capital Method, because it frequently produces a lower result for corporations with high authorized shares.
The most common (and expensive) mistake is paying based on authorized shares without running the assumed par value capital calculation first.
Delaware makes clear how the assumed par value capital method is computed and what inputs it requires (issued shares and total gross assets). And Delaware publishes the minimums and maximums for both methods, which is why it’s worth evaluating both annually rather than defaulting.
A smart annual habit for Delaware-registered businesses
If your business is incorporated in Delaware, build this into your annual compliance routine:
- Confirm your authorized and issued share numbers are accurate
- Confirm total gross assets align with your reporting (Delaware ties this to federal return reporting for corporations)
- Run both calculations before filing and paying
- Keep your entity in good standing by paying on time through Delaware’s official filing system
When to get help
If you’re seeing a Delaware franchise tax bill that feels out of proportion to the size of the company, or if your cap table/authorized share structure changed recently, it’s worth having your legal and accounting teams review the inputs and confirm you’re using the most appropriate method.
Our attorneys regularly advise growing businesses on corporate housekeeping and compliance issues that intersect with financing, governance, and ongoing filings, including the practical implications of Delaware entity decisions. If you have questions or want our input, don’t hesitate to reach out.
Disclaimer: This content is provided for general informational purposes only and does not constitute legal advice. Reading this material does not create an attorney-client relationship. You should consult with legal counsel regarding your specific situation.