Incorporator The Journal of U.S. Formation
Start Free Quiz
Editorial 5 MIN READ

How to read a Delaware franchise tax notice

Why a two-person C-corp gets a $75,000 bill in February and what to do about it

The Editors
Staff, Incorporator.org
5 min read Updated
Contents 5 sections
  1. The two numbers on the page
  2. The § 502 report is the mechanism
  3. How to read the notice line by line
  4. What to actually do in the next week
  5. Sources

he envelope arrives in late January with the Delaware state seal on it. Inside is a one-page notice telling a newly incorporated C-corporation that it owes seventy-five thousand dollars, or sometimes more, by March 1. The company has no revenue, no assets, and two founders who have not yet been paid. This is a normal and entirely fixable event.

This piece is about how to read that notice, why the scary number is almost never the number you actually owe, and how the two calculation methods in 8 Del. C. § 503 produce radically different results for the same company.

The two numbers on the page

Every stock corporation chartered in Delaware pays an annual franchise tax under 8 Del. C. § 503. The Division of Corporations computes the tax two ways and prints both on the notice, but the number displayed most prominently — and pre-filled on the payment voucher — is the authorized shares method. The smaller number, almost always, is the assumed par value capital method. Delaware lets you pay whichever is lower. It is not required to remind you of this; the statute puts the election on the taxpayer.

The authorized shares method is mechanical. Under § 503(1):

  • 5,000 authorized shares or fewer: $175.
  • 5,001 to 10,000 shares: $250.
  • Each additional 10,000 shares (or part thereof): add $85.
  • Capped at $200,000 per year.

This is why the number is large. A standard Delaware C-corp formed on the advice of startup counsel is chartered with 10,000,000 shares of common stock — the default in most incorporation templates. Run the math: $250 for the first 10,000, plus $85 for each of the remaining 999 increments of 10,000. That is $250 + (999 × $85) = $85,165. Add the $50 annual report filing fee under the Division's fee schedule and the notice prints $85,215.

The assumed par value capital method is the escape hatch. Under § 503(2), the tax is $400 for every $1,000,000 (or fraction) of "assumed par value capital," with a $400 minimum. Assumed par value capital is derived from two inputs the corporation reports on the annual franchise tax report: total gross assets (from the federal Form 1120, Schedule L, line 15, column (d), as of the fiscal year end) and total issued shares. The Division's calculator does the arithmetic; the governing logic is in § 503(2) and in the instructions accompanying the annual report.

For a pre-revenue C-corp with, say, $50,000 in the bank, 8,000,000 shares issued to founders, and 10,000,000 authorized at $0.0001 par, the assumed par value calculation lands at the $400 minimum. The bill the company actually owes is $400 plus the $50 annual report fee: $450. The notice said $85,215. The delta is $84,765, and it exists because the default print is the worse of two legal methods.

The § 502 report is the mechanism

The election does not happen by phone call. Under 8 Del. C. § 502, every domestic stock corporation must file an annual franchise tax report on or before March 1, setting out the information the Division needs to compute the tax — including the inputs required for the assumed par value method. The report is filed electronically through the Division's portal, along with payment of the tax and the $50 filing fee. Filing the report with accurate gross-assets and issued-shares data is how you invoke the cheaper method; the Division's Franchise Tax Calculator at corp.delaware.gov previews both numbers before you submit.

Miss the March 1 deadline and § 502(c) applies: a $200 penalty, plus 1.5% interest per month on the unpaid tax, compounding monthly. A corporation that ignores two consecutive reports loses good standing; one that ignores three is voided under § 510. None of this is theoretical. The Division voids several thousand corporations every year on exactly this path.

How to read the notice line by line

The notice is short, and every field on it maps to a statutory input. Read it in this order.

Entity name and file number. Confirm the file number matches your Certificate of Incorporation. Delaware has more than a million active entities and the notices are produced by batch; typos in name do not change what you owe but do matter for good standing.

Annual report filing fee: $50. Non-negotiable. This is a separate line from the tax and is owed even if the tax is the $175 minimum.

Authorized shares. Pulled from your Certificate of Incorporation. If this is 10,000,000 and you did not mean it to be, you have two choices: pay under the assumed par value method for as long as it is cheaper, or file a Certificate of Amendment to reduce authorized shares. Amendments cost $194 for the first page plus filing fees and require a board and stockholder vote under 8 Del. C. § 242.

Issued shares. Pulled from your annual report. If you report zero issued shares, Delaware defaults the assumed par value calculation to the authorized shares number, and the two methods produce nearly identical results. Issue your founder stock promptly after formation; unissued authorizations help nobody.

Total gross assets. The number from Schedule L of your federal Form 1120. Pre-revenue companies often report a few tens of thousands of dollars. This is the denominator that drives the assumed par value method down.

Tax due (authorized shares method). The scary number.

Tax due (assumed par value capital method). The real number for most startups.

Pay the lower of the two. The statute permits this explicitly.

What to actually do in the next week

If your corporation was formed within the last year and the notice reads five figures or more, do not pay the printed amount. Log into the Division's online filing system, run the Franchise Tax Calculator with your actual gross assets and issued shares, file the annual report under § 502, and pay the assumed par value figure. For a typical pre-revenue C-corp that has issued founder stock, this takes about twenty minutes.

If your corporation has real assets — meaningful cash from a priced round, equipment, receivables — the assumed par value number will be higher than the $400 floor, and may be higher than the authorized shares number. Run both calculations every year. The right method is not a lifelong choice; it flips as the balance sheet changes.

If the March 1 deadline is already past, file anyway and pay the tax, penalty, and interest. The Division does not negotiate the penalty. It does, however, restore good standing promptly once the balance is cleared, which matters if the corporation needs to sign a lease, close a financing, or qualify to do business in another state.

One rule of thumb for founders: a Delaware C-corp with minimal assets and ten million authorized shares should expect to owe roughly $450 a year — $400 under § 503(2) plus $50 under the annual report fee — not the $85,000 the notice suggests. The notice is not wrong; it is showing you the statute's two answers and letting you pick.

Sources

Keep reading

More from the journal.