Crucial Corporate Tax Secrets For Founders
In our previous article, we introduced the Delaware Franchise Tax and explained the critical difference between the two calculation methods: the Authorized Shares method and the Assumed Par Value Capital method. Choosing the right one can save your startup thousands of dollars.
Now, it’s time to get practical. This guide will walk you through the exact steps for calculating your tax liability using both methods, so you can see the difference for yourself.
Before You Begin: Gather Your Key Information
To perform these calculations, you will need four key pieces of information from your corporate records and financial statements:
- Total Authorized Shares: The maximum number of shares your corporation is legally allowed to issue. (Found in your Certificate of Incorporation).
- Total Issued Shares: The number of shares that have actually been issued to founders, investors, and employees. (Found on your cap table).
- Par Value: The nominal value assigned to each share. (Found in your Certificate of Incorporation).
- Total Gross Assets: The total assets of your company at the end of the tax year. (Found on your company’s balance sheet and typically Schedule L of your federal tax return Form 1120).
Let’s use a hypothetical startup, “Taxculate Inc.,” for our examples.
- Authorized Shares: 10,000,000
- Issued Shares: 8,000,000
- Par Value: $0.00001
Total Gross Assets: $100,000
Calculation for Taxculate Inc.:
Taxculate Inc. has 10,000,000 authorized shares, which is well above the 10,000-share threshold.
- Tax on the first 10,000 shares: $250
- Calculate additional share blocks: (10,000,000 – 10,000) = 9,990,000 additional shares.
- Divide by the block size: 9,990,000 / 10,000 = 999 additional blocks.
- Calculate the additional tax: 999 blocks * $85/block = $84,915
- Total Tax: $250 + $84,915 = **$85,165**
Using the default method, Innovate Inc. would face a staggering tax bill of $85,165
Method 2: The Assumed Par Value Capital Method Calculation
This method is more involved but is almost always the better option for startups. Follow these steps carefully.
Step 1: Calculate Your “Assumed Par Value”
Divide your Total Gross Assets by your Total Issued Shares.
- Formula: Total Gross Assets / Total Issued Shares = Assumed Par Value
Calculation for Innovate Inc.: $100,000 / 2,000,000 = **$0.02**.
Step 2: Calculate Your “Assumed Par Value Capital”
Multiply the Assumed Par Value by your Total Authorized Shares.
- Formula: Assumed Par Value * Total Authorized Shares = Assumed Par Value Capital
- Calculation for Innovate Inc.: $0.02 * 10,000,000 = **$200,000**
Step 3: Calculate the Final Tax
Delaware applies a tax rate of $400 for every $1,000,000 (or fraction thereof) of your Assumed Par Value Capital. The minimum tax for this method is $400.
- Divide Capital by $1,000,000: $200,000 / $1,000,000 = 0.2
- Multiply by the tax rate: 0.2 * $400 = **$80
Using this method, the tax for Innovate Inc. is $400.
The Result: A Clear Winner
Let’s compare the outcomes:
- Authorized Shares Method Tax: $85,165
- Assumed Par Value Capital Method Tax: $400
By performing both calculations, Innovate Inc. can legally choose to pay the lesser amount,of $85,165 or $450. Remember, you must also pay the $50 Annual Report filing fee, making the total payment $450.
While the math is straightforward with the right numbers, errors can be costly. Ensuring your asset values are correct and the calculations are performed properly is key.
Taxculate
At Taxculate, we specialize in making sure these calculations are done right, every year. We take the complexity off your plate so you can focus on your business, confident that you’re not overpaying on your state franchise taxes.
