State Tax Update for Delaware Corporations

by Dechert LLP

Dechert LLP

While the State of Delaware has numerous attractive aspects for entities that incorporate there (a flexible corporation statute, the well-respected Court of Chancery, a legislature that prioritizes the stability of Delaware’s business laws), Delaware’s corporate franchise tax can be an unexpected burden. On July 2, Delaware Governor John Carney signed a budget bill for Fiscal Year 2018 that includes a provision making Delaware’s corporate franchise tax even more burdensome. 

Delaware’s franchise tax is generally imposed on all corporations incorporated in the state irrespective of whether they actually do business there. Moreover, as a tax that is calculated based on capital stock, it is imposed on corporations even if they are not generating income. 

Delaware Raises the Cap

Previously, the franchise tax was capped at US$180,000 per year. The newly enacted law increases the maximum tax from US$180,000 to US$200,000 per year (and US$250,000 per year for Large Corporate Filers, defined as public companies with assets and annual revenues above certain thresholds).1 This increase should give small and middle-market corporations reason to consider recapitalizing, amending their certificate of incorporation to adjust their authorized number of shares, or converting to LLC or LP status. Partnerships and limited liability companies that are formed or registered in Delaware are subject to an annual tax of US$300 instead of the corporate franchise tax.

Why It Matters

Delaware franchise tax can add up considerably just by having the certificate of incorporation authorize many more shares than will be needed in the near future. The number of authorized shares directly impacts the Delaware corporate franchise tax amount, which can make it expensive for a Delaware corporation to authorize shares and not issue them. 

To illustrate the extent to which Delaware’s annual franchise tax can add up using the Authorized Shares Method,2 the tax amount at various authorized share levels is below:

  • Authorizing 10,000 shares results in US$250 in annual corporate franchise tax.

  • Authorizing 100,000 shares results in US$1,015 tax (US$250 plus US$85 for each additional 10,000 shares or portion thereof).

  • Authorizing 1,000,000 shares results in US$8,665.

  • Authorizing 10,000,000 shares results in US$85,165.

  • Authorizing 25,000,000 shares results in: (i) for Large Corporate Filers (defined above), US$212,665 in annual tax; and (ii) for all other corporations, US$200,000 in annual tax (the maximum annual Delaware franchise tax for such corporations).

  • Authorizing 30,000,000 shares results in: (i) for Large Corporate Filers, US$250,000 in annual tax; and (ii) for all other corporations, US$200,000 in annual tax (in each case, the maximum annual Delaware franchise tax for such corporations).3

In summary, Delaware franchise tax liability can be significant, and it is advisable for Delaware corporations to avoid authorizing large numbers of shares unless consideration is given to the Delaware franchise tax cost of doing so. Delaware’s recent increase in the cap on the tax heightens the importance of that analysis. 


1) H.B. 175, §§3-4, 149th Gen. Assemb. (Del. 2017). Specifically, the legislation applies the higher cap to public companies that have “(a) consolidated annual gross revenues equal to or greater than US$750,000,000 or consolidated assets equal to or greater than US$750,000,000; and (b) consolidated annual gross revenues not less than US$250,000,000 and consolidated assets not less than US$250,000,000.” Id. If a company has US$750 million or more of one measure (assets or annual revenues) and less than US$250 million of the other, it will not be subject to the higher cap.

2) The franchise tax owed could be lower depending on the amount produced using the Assumed Par Value Method in section 503(a)(2), but that method too produces a tax amount that increases as the number of authorized shares increases.

3) See 8 Del. C. § 503(a), (c).


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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