For as long as I can remember Delaware has been hailed as the pro-business jurisdiction; the gold standard for corporate law, investor predictability, and efficient courts. Law schools use it as the gold standard and companies have flocked there for good reasons, such as a sophisticated Court of Chancery, a robust body of case law, and streamlined governance rules.
But there is one corner of Delaware law that quietly ambushes unsuspecting founders, accountants, and even seasoned lawyers: the franchise tax formula. Unlike the state’s otherwise business-friendly reputation, this one can feel more like a trapdoor than a welcome mat.
The Hidden Math Problem in Your Certificate of Incorporation
It starts innocently: a startup authorizes, say, 10 million shares of common stock. This tends to be standard, and founders rightfully assume that high authorized shares will give the company room for fundraising, equity incentives, and capitalization flexibility.
But there’s a twist: if a company does not file its annual report on time (due March 1 each year), Delaware defaults to its Authorized Shares Method for calculating franchise tax. And this method cares only about two numbers:
- Authorized shares, and
- How many millions of shares those authorized shares represent.
Not revenue.
Not profit.
Not assets.
Not employees.
The only thing that matters is share count.
Under this formula, a corporation with 10 million authorized shares can face franchise taxes upwards of $85,000 per year, even if its assets are modest and only a handful of shares have actually been issued. Worse, if the company falls behind for some years, interest and penalties pile on at 1.5% per month. Before long, the business-friendly state starts to feel like it’s charging late fees more aggressively than Uber surges when you have to get somewhere fast.
“But we only issued a few shares!” …Why Delaware doesn’t care
Many companies have capital structures with huge, authorized share pools but tiny actual issuances. While founders expect that this will keep things simple, in Delaware, simplicity comes at a price. Delaware allows corporations to elect a much more favorable tax method: the Assumed Par Value Capital Method, more closely aligning tax liability with actual business size and assets.
But there’s a catch. To use this method, you must file your annual report on time and provide accurate data on:
- Issued shares, and
- Total assets (from the company’s balance sheet).
If you miss the deadline, Delaware locks you into the authorized-shares default, and suddenly the tax jumps from a few thousand dollars to tens of thousands, and sometimes over six figures.
Why This Matters to Founders and Executives
The franchise tax system is structured less like a punishment for large companies and more like an unintentional penalty on fast-growing startups with large, authorized share pools and lean administrative teams. Here’s what every Delaware corporation should do:
- Revisit authorized vs. issued shares: If you have millions of authorized shares but have only issued a small fraction, consider whether issuing additional shares aligns with your long-term capitalization strategy. More issued shares = greater ability to use the favorable tax method.
- Calendar March 1 like it’s the corporate Super Bowl: Annual filings are not optional, and Delaware does not send friendly reminders.
- Consider whether Delaware is still the right home: Some companies are now redomesticating or reincorporating in states with lower franchise tax burdens, no authorized-shares-based tax system, or just simpler administrative frameworks.
- Talk to counsel before making structural decisions: Delaware’s rules are powerful, but they’re also precise. A well-informed choice can save a company from paying unnecessary (and unexpectedly high) taxes.
Delaware is pro-business in many respects, but its franchise tax machinery is a strict, formula-driven system with sharp edges for companies that fall behind or misunderstand the interaction between authorized shares and issued shares. If you’re incorporated in Delaware, make sure your corporate housekeeping is timed, tracked, and treated as a priority. One missed report can make the “business-friendly” state feel anything but.
