“Gaaaaah!!!!  I just checked my franchise tax estimate on Delaware’s Secretary of State’s automated website and they say my tax bill is $15,000 plus!  I just started my company and I don’t have that kind of money!!!!  What am I going to do.?  Why didn’t you warn me about this?”

Come franchise tax time, I always have a couple of these calls from hyperventilating, irate founders and who can blame them?  How would you feel if you were hit (and I mean hit) with a $15,000 tax bill for a company you just formed, that essentially has a nominal market value? 

Worry not, I have good news and even better news for harried, astounded and shell-shocked founders suffering from what I would term – franchitax scareisis delawaris .

The good news is that in calculating these outlandish tax estimates for corporations, Delaware is using the Authorized Shares Method (AS Method), which only takes into account the number of authorized shares a corporation has.  The more authorized shares your have, the greater your tax (the maximum is $180,000):

Using the AS method , if you have a corporation with a few million shares, which I usually recommend to start-ups, you’re looking at a whopping tax bill of about $15,000 to $20,000.  Now you might ask - Why a few million shares?  Wouldn’t it make sense for me to issue just a few hundred or a thousand shares? (No, it isn’t.  Why?  A couple of reasons –Optics, a cushion, and did I say Optics.  Stay tuned for a future blog post for the full story)

Now the great news…. There is another method that corporations can use when calculating their annual Delaware franchise taxes.  An imminently sensible alternative for start-ups:  The Assumed Par Value Capital Method (APV Method).  The APV Method takes into consideration the issued shares (not the authorized shares) and the total gross assets of the company.  Here’s an example from the Deleware’s Secretary of State’s Website on how the APV Method should work:

The Assumed Par Value Capital Method

The example cited below is for a corporation having 3,000,000 shares of stock with a par value of $1.00 and 250,000 shares of stock with a par value of $5.00 , gross assets of $1,000,000.00 and issued shares totaling 485,000.

1. Divide your total gross assets by your total issued shares carrying to 6 decimal places.  The result is your "assumed par".
   
   Example: $1,000,000 assets, 485,000 issued shares = $2.061856 assumed par.
2. Multiply the assumed par by the number of authorized shares having a par value of less than the assumed par.
   
   Example: $2.061856 assumed par s 1,000,000 shares = $2,061,856.
3. Multiply the number of authorized shares with a par value greater than the assumed par by their respective par value.
   
   Example: 250,000 shares s $5.00 par value = $1,250,000
   
   
4. Add the results of #2 and #3 above.  The result is your assumed par value capital.
   
   Example:  $2,061,856 plus $1,250,000 = $3,311 956 assumed par value capital.
5. Figure your tax by dividing the assumed par value capital, rounded up to the next million if it is over $1,000,000, by 1,000,000 and then multiply by $350.00.
   
   Example: 4 x $350.00 = $1,400.00
6. The minimum tax for the Assumed Par Value Capital Method of calculation is $350.00.

Now given that most start-ups in their early stages (pre-venture funding) have only one class of shares (common stock) and have no sizable assets  you will end up with a much lower franchise tax (usually the minimum of $350).  You can even calculate your franchise tax using this handy calculator available on the Deleware Secretary of State’s website.  So breathe a sigh of relief, yes you will owe some franchise taxes, but they will be nominal compared to the amount owed using the Authorized Share Method.