Don’t Pay More Than You Have to in Delaware Franchise Taxes
When we enroll an already existing Delaware corporation into our entity management service, the first thing we do is check the company’s share structure. If the corporation has authorized, but not issued, more than 5,000 shares of stock, unless the owners can articulate a good reason for doing so, we will amend the company’s articles of incorporation to decrease the number of authorized shares to 5,000 to save the owners money on their annual franchise taxes.
States generally require corporations to pay an annual franchise tax for the privilege of doing business in that state. Delaware is unique in the way it calculates the franchise tax that each Delaware corporation must pay every year. Delaware actually provides two methods for computing the annual franchise tax, and allows each corporation to select the method that will result in paying the lesser amount of tax.
The first method is the “Authorized Shares Method.” It is both easier to calculate and will result in the lowest annual franchise tax for a small corporation with few shareholders that does not need to authorize and issue a substantial number of shares. Under this method, a corporation that has authorized 5,000 shares or less of stock pays the minimum annual franchise tax of $175. The tax goes up to $250 if the corporation has authorized between 5,001 and 10,000 shares. For each additional 10,000 shares, or part thereof, the corporation must pay an additional $85. So, if a corporation has 10,005 authorized shares, it must pay an annual franchise tax of $335 ($250 plus $85). If the corporation has 100,000 authorized shares, it must pay $1,015 ($250 plus $765 [$85 times 9]). If the corporation wants to really go big or go home and has authorized 1,000,000 shares, it must pay a whopping franchise tax of $8,665 ($250 plus $8,415 [$85 times 99]). As we said, in the absence of some good reason to have more than 5,000 authorized shares, a corporation should never pay more than the minimum annual franchise tax of $175 just for the privilege of being able to say that it has some huge number of authorized but unissued shares.
The second method for computing the annual franchise tax under Delaware law is the “Assumed Par Value Capital Method.” To use this method, the corporation must give figures for all of its issued shares and its total gross assets in the corporation’s annual franchise tax report. Those figures are used to calculate the assumed par value of the corporation’s stock and then its total assumed (not actual) par value capital. The tax rate under this method is $400 per $1,000,000 or portion thereof of the corporation’s assumed par value capital. Yes, it can be as complicated as it sounds. What is important for the purposes of this article is that the minimum franchise tax under this method is $400 (not including the $50 annual franchise tax report fee, see note 4), which is $225 more than a small corporation with 5,000 authorized shares would pay under the Authorized Shares Method.
In sum, a small Delaware corporation that has no need to authorize more than 5,000 shares of capital stock should never do so, to avoid paying additional franchise tax every year for no good reason. And that is why our practice is to amend an already existing Delaware corporation’s articles of incorporation to decrease the company’s number of authorized shares to 5,000, if the corporation has authorized more shares than that without a valid reason for doing so.
 There is a difference between authorized and issued shares of corporate stock. When forming a Delaware corporation, the certificate of incorporation must state, among other things, “the total number of shares of stock which the corporation shall have authority to issue and the par value of each of such shares, or a statement that all such shares are to be without par value.” Del. Code Ann. tit. 8, § 102(a)(4) (emphasis added). The corporation is not, however, required to actually issue all of the shares that it is authorized to issue in its certificate of incorporation. Rather, the corporation may issue shares, from time to time, in exchange for some benefit (consideration) to the corporation, until all of the authorized shares have been issued. See Del. Code Ann. tit. 8, § 152.
 There is generally no good reason for a small, closely held corporation to authorize more than 5,000 shares of stock. Obviously, if the corporation is larger and has, or ultimately expects to have, a substantial number of shareholders, then it may make sense to authorize more than 5,000 shares of stock. However, the articles of incorporation can always be amended to increase the number of authorized shares, so if the corporation is starting out small, even if it expects and hopes to eventually grow substantially, it still makes sense to start out authorizing 5,000 shares or less for the reason stated in this article. See Del. Code Ann. tit. 8, § 242(a)(3) (certificate of incorporation may be amended to increase or decrease the corporation’s authorized capital stock).
 See Del. Code Ann. tit. 8, § 503(a); Delaware Division of Corporations, How to Calculate Franchise Taxes (advising corporations to “[u]se the method that results in the lesser tax”), last accessed June 7, 2022.
 See Del. Code Ann. tit. 8, § 503(a)(1), (c). This does not include the $50 fee paid at the time of filing the corporation’s annual franchise tax report. See Del. Code Ann. tit. 8, § 502. In other words, the minimum amount a corporation must pay in connection with its annual franchise tax is actually $225, even though the tax itself only comes to $175.
 See Delaware Division of Corporations, How to Calculate Franchise Taxes (giving a six-step example for how to calculate the franchise tax owed for a corporation having 1,000,000 authorized shares of stock with a par value of $1.00 and 250,000 authorized shares of stock with a par value of $5.00, 485,000 issue shares, and gross assets of $1,000,000); 1 Delaware Corporation Law and Practice § 3.06 (2021) (computing the franchise tax under the Assumed Par Value Capital Method requires a “careful parsing” of the statute).