The par value is also the amount upon which the entity calculates the interest that it owes to investors. Thus, if the stated interest rate on a bond is 10% and the bond par value is $1,000, then the issuing entity must pay $100 every year until it redeems the bond. Thus, par value is important from the perspectives of both determining the maturity amount to pay back to investors, and the amount of interest to pay them. The intent behind the par value concept was that prospective investors could be assured that an issuing company would not issue shares at a price below the par value. Each additional 10,000 shares add $85 with the maximum annual tax due of $200,000. Many founders decide to incorporate their business in the State of Delaware, often at the advice of corporate attorneys and investors.
- Par value is the value assigned to the share of stock when it is initally issued by a company.
- I have assisted my clients in closing hundreds of seed/venture financings and M&A transactions and numerous initial and secondary public offerings.
- Each additional 10,000 shares add $85 with the maximum annual tax due of $200,000.
- This foundational document is filed with the state to legally form the corporation.
- The Delaware annual report and franchise tax payment are both due by March 1.
Most VC backed startups are Delaware C-Corps, which means that most VC-backed startups DO need to file. The minimum payment using the Assumed Par Value Capital method is $400, and there is no maximum. If your DE franchise tax seems too high, use our calculator to see if your CPA used the wrong calculation method, and read our info on how the calculation method can dramatically increase the tax bill.
The Assumed Par Value Capital Method
In addition to financial penalties, failing to pay franchise taxes can lead to having your business license or permit revoked and could even result in criminal prosecution. For these reasons, it is important to be aware of your franchise tax obligations in every state where you do business and make sure that you make all franchise tax payments on time. A franchise tax is not a tax on franchises, like a McDonald’s or a 7-Eleven.
- Most VC backed startups will have very low par value shares, meaning that you’ll end up using the assumed par value in the franchise tax calculation.
- After two years of non-filing and non-payment of the Delaware LLC annual fees, the corporation’s Certificate of Incorporation will be revoked.
- This method calculates the tax based on your corporation’s total gross assets and the ratio of issued shares to authorized shares.
Most startup companies are typically formed with a small number of authorized shares and a low (or zero) par value. Technology and life sciences companies that choose to incorporate in Delaware must pay an annual franchise tax. In most cases, businesses are required to file separate franchise tax returns in each state where they do business. The due date for filing a franchise tax return depends on the state and may vary from year to year.
Methods of Calculating the Tax
The minimum tax for companies using the Authorized Shares Method is $175, and the maximum annual tax is $200,000. We’ve seen startups get a huge tax bill when this calculation method is used; let’s do an example of a typical, venture backed startup. If a corporation has 5,000 shares or less, it pays the minimum tax of $175. For corporations conservatism principle of accounting with over 10,000 shares, the tax is $250 plus $85 for each additional 10,000 shares (or portion thereof) to a max annual tax of $200,000. The state of Delaware offers two ways to calculate the annual franchise tax for corporations, and it is important to understand how the use of each method affects the franchise tax required to be paid.
Just a reminder to those who have Delaware corporations, your annual report and franchise tax payment are both due on March 1. You must file your annual report if your business is a corporation and pay your franchise tax and filing fee by March 1. All LLCs, Limited Partnerships, and General Partnerships formed in Delaware are required to pay the annual franchise tax by June 1.
Delaware franchise tax example
They mail your official business address an annual reminder to pay your franchise taxes. Roughly, if you’ve raised $500k to $1M in venture funding, you are likely to owe between $500 to $1,000. If you’ve raised $10M in VC funding, you are going to owe closer to $4,000.
How is the Delaware franchise tax calculated?
Unfortunately, he didn’t get the chance to tell her his new plan to sell his stock in his software animation company so she’d have all the money she needed. While our last method was straightforward, the « Assumed Par Value Capital Method » is where the plot thickens, taking us on a more winding path in the realm of Delaware taxation. Receive the latest business insights, analysis, and perspectives from EisnerAmper professionals.
The calculation of tax due is affected by stock issuances throughout the year and is prorated for each period between the issuances. This method is a bit more complicated, because it involves calculating your business’s assumed par value—i.e. For most VC backed startups, the par value will be listed in one or more of the following legal documents. (Make sure you work with experienced attorneys so they don’t mess up important items like par value!) Your lawyer may also have put your par value into your cap table software. The report must be filed online and received by the Division of Corporations on or before March 1st.
Annual Report Filing Fee:
Simply report your corporation’s total gross assets and the number of shares issued when completing the online filing. Form 1120 Schedule L for tax year ending prior to filing the Delaware franchise tax report. Thus, for a calendar-year taxpayer, total assets reflected in a corporation’s March 1, 2021 Delaware franchise tax filing should tie to Form 1120, Schedule L for the tax year ending in 2020. If the federal income tax return is on extension, other financial data will need to be used for total gross assets. Interests in entities that are consolidated with the Delaware reporting company must be included in “total gross assets” at a value determined in accordance with GAAP. For each additional 10,000 shares, add $75 to the tax total, with a maximum franchise tax of $180,000.
What other taxes do Delaware corporations need to file/pay?
Schedule L
Occasionally the state will require not only the reporting of those figures, but also proof. Proof is accepted in the form of a copy of the corporation’s Schedule L of their signed and filed Federal return. « EisnerAmper » is the brand name under which EisnerAmper LLP and Eisner Advisory Group LLC and its subsidiary entities provide professional services. EisnerAmper LLP is a licensed independent CPA firm that provides attest services to its clients, and Eisner Advisory Group LLC and its subsidiary entities provide tax and business consulting services to their clients. Eisner Advisory Group LLC and its subsidiary entities are not licensed CPA firms. Incorporating in a state usually creates income tax nexus with the jurisdiction.
Please also note that if an amendment was filed changing your stock or par value, the figures must be reported for each period and the tax is then prorated for each portion of the year that stock was in effect. The Assumed Par Value Capital Method is an alternative method of calculating the annual franchise tax and, for many corporations, usually results in the lesser amount of tax. The tax rate under this method is $400.00 per million or portion of a million of “assumed par value capital” – which is determined based on the assets and issued shares. The minimum franchise tax for corporations using the Assumed Par Value Capital Method is $400. To use this method, you must give figures for all issued and outstanding shares and total gross assets in the spaces provided in your annual franchise tax report.