Delaware C corp: the two tax calculations, and the seventy times between them

I have been telling founders that a Delaware C corp costs about 500 dollars a year to keep alive. I have said that number out loud in a dozen conversations, and it sits in a budget template that other people have copied off me. For some companies it is right. For others I had it wrong by a factor of seventy, and the reason is not buried in a statute. It sits on one page of the state's own website, in a sentence I had read several times without understanding it.

The sentence is nine words long. “Use the method that results in the lesser tax.”

There are two methods. Same company, same filing, same afternoon. I put an ordinary cap table through both this week and got 85,165 dollars out of one and 1,200 out of the other. Do not pay the first notice you receive until you have run the second calculation yourself. Everything below is what I should have known before I started quoting a figure to people who then put it into their own plans.

The bill that arrives in February and frightens everybody

Delaware assesses the franchise tax by default on the number of shares you told it you could issue. The Division of Corporations calls this the authorized shares method, and its own page lays the ladder out: 5,000 shares or fewer costs 175 dollars, 5,001 to 10,000 costs 250, and then “each additional 10,000 shares or portion thereof add $85.00”. The state gives its own worked example, which is worth reading before your first March in business, because it shows the shape of the thing rather than the size: “A corporation with 100,000 shares authorized pays $1,015.00 ($250.00 plus $765.00 [$85.00 x 9])”.

Now take the cap table that every incorporation service hands a startup. Ten million authorized shares, because that is the round number the templates use and because it divides neatly into an option pool.

Ten million shares run 999 steps up that ladder past the first 10,000. At 85 dollars a step, that is 84,915 dollars, plus the 250 you started at. Total 85,165 dollars. The company owing it may have no revenue and four people.

This is a model rather than a measurement, and every input is above so you can change it. But it is the exact model that produces the notice, and the notice is real. It goes out in the winter, it says a number in the tens of thousands, and every year a founder reads it as a bill from a state they had been told was cheap.

The second method, which is the one you actually pay

The assumed par value capital method uses two facts the first method ignores completely: how many shares you have really issued, and what the company actually owns. Delaware states the rate plainly, at “$400.00 per million or portion of a million” of assumed par value capital. Gross assets come off a line you already file, “those ‘total assets’ reported on the Form 1120, Schedule L (Federal Return)”.

Run the same company again. Ten million shares authorized, eight million issued to the founders, two million dollars sitting in the bank after a pre-seed, par value set at a hundredth of a cent because that is also what the templates do.

Divide 2,000,000 of assets by 8,000,000 issued shares and the assumed par comes out at 25 cents. Multiply that by the 10,000,000 authorized and you get 2,500,000 dollars of assumed par value capital. Round up to the next million, which the state requires, and you are taxed on 3,000,000. Three times 400 dollars is 1,200 dollars. That is your bill, and it is the whole bill.

The same company, on the same day, owes either 85,165 dollars or 1,200. The gap is seventy times over and it is decided entirely by which box gets filled in, which is a strange way to run a tax and it is also the honest answer to what a Delaware C corp costs to keep.

Fill in the second calculation even when the notice looks settled. The notice is generated from the method that needs the least information about you. Nobody at the state is going to volunteer that you have overpaid.

The part I got properly wrong

Here is what I had missed, and it is worse than the headline number, because this is the part that repeats every year.

The tax under the second method is a function of your gross assets. Gross assets, for most young companies, means the money in the bank. So the franchise tax is indexed to your last funding round and to nothing else at all. Not revenue, not headcount, not profit.

The timing underneath that is worth an extra minute, because it is the only lever in the whole calculation you actually control. The state ties gross assets to the total assets line on the return “relative to the company's fiscal year ending the calendar year of the report”, so the balance that decides the bill is the one standing at your year end rather than the one on the day the notice lands, which means a round closing in the first week of January instead of the last week of December pushes the entire increase into the following year and buys the company twelve months at the smaller number. I am not telling anybody to reschedule a wire over it.

Run the same eight million issued shares against a company that has just closed ten million dollars. Assumed par is now 1.25 dollars. Ten million authorized at 1.25 gives 12,500,000 dollars of assumed par value capital, which rounds up to 13 million, which is 5,200 dollars.

So the reward for raising is a bill four times larger, arriving in the March after the round, in the same quarter you are hiring against the money. I do not think that is outrageous. It is a capital tax and capital taxes work this way. I am mildly annoyed that I have never once seen the line in a post-round budget, including in the budgets I built myself.

There is a threshold underneath this that moves it from annoying to operational. Delaware requires companies owing 5,000 dollars or more to pay in instalments across the year: 40 per cent by 1 June, 20 by 1 September, 20 by 1 December, the rest by 1 March. A company that crosses 5,000 dollars has not just acquired a bigger cost. It has acquired a payment calendar it did not have the year before, four dates that somebody has to own, and a quarterly reminder in a finance function that at that stage is usually one person doing this alongside everything else they were hired to do.

Dates, in the order they will hurt you

Corporations file the annual report and pay the tax by 1 March for the prior year, online only, and the report itself costs 50 dollars for the ordinary non-exempt company. Miss it and Delaware charges “a penalty of $200.00 plus 1.5% interest per month on tax and penalty”, which compounds on both parts rather than on the tax alone.

Delaware LLCs live on a different calendar. This is where converted companies get caught. An LLC pays 400 dollars a year by 1 June and files no annual report at all, which the state puts in a single line: “LLCs, LPs, and GPs are not required to file Annual Franchise Tax reports with the Division of Corporations, they must pay the $400 yearly tax on or before June 1st”. There is no proration either, so an entity alive for six weeks of the year owes the same 400 dollars as one alive for all twelve months of it.

Convert from an LLC to a C corp partway through a year and you have two deadlines, two regimes, and a 1 June payment that has quietly stopped having an entity attached to it in your head. I have watched that exact gap produce a penalty on a company with money in the bank the entire time.

A digression about the number I expected to find

This has nothing to do with your filing. I went looking for it because I had assumed I already knew the answer.

The story I absorbed over the last two years is that companies are leaving Delaware. Boards reincorporating in Texas and Nevada, unhappiness about the courts, the whole argument that arrived with a nickname attached. I expected to open the state's own statistics page and watch formations fall.

They are not falling at all. Delaware reports 334,461 new entities formed in 2025 against 289,810 in 2024, a rise of more than 15 per cent. Corporations specifically went from 58,313 to 74,716, up 28 per cent in a single year, and their share of new formations rose from 20.1 per cent to 22.3. The state says it now holds “more than 2.28 million entities” and “over two-thirds of the Fortune 500”.

I cannot square 74,716 new corporations with a story about everybody leaving, and I am not going to pretend I can. The reconciliation I would offer, if somebody made me offer one, is that the two populations barely touch each other at any point: the companies whose reincorporation makes the news are a few dozen listed businesses with boards, proxy advisers and shareholders who get to vote on the question, while the 74,716 are overwhelmingly companies being formed this month by two people who will never hold a proxy vote about anything. That difference is not nothing. But I had absorbed the departure story as though it described the whole market, and it describes a corner of it.

Anyway, back to the paperwork and the two calculations.

What this actually costs, assembled

For an ordinary early-stage company that files on time and uses the cheaper method, the recurring cost is 400 dollars of tax at the assumed par value minimum, plus the 50 dollar report fee, plus a registered agent. That last line is a market price rather than a published one, and the only Delaware provider I have found publishing a flat annual figure at all quotes 50 dollars.

That lands near 500 dollars, which is where my original number came from. My number was not invented. It was the floor, and I had been quoting the floor as though it were the answer.

The company with two million in the bank pays 1,250 dollars all in. The company that raised ten million pays 5,250 and starts paying it in four instalments. The same company that never fills in the second calculation pays 85,215. All four of those are the cost of a Delaware C corp, and which one you get depends on arithmetic you do yourself, in a browser, in about ten minutes.

Put the four figures in the model where you keep runway, not in a note. A line that moves with the bank balance belongs next to the bank balance, and it is the only cost on this list that will surprise a finance function twice in the same year, once when it lands and once when it changes size because the money did.

There is a smaller trap in the same paragraph, and it caught me on a company I was helping last spring. Authorized shares are not free to hold. A board that authorises 20,000,000 because somebody said it makes the option pool tidier has doubled the ladder underneath the first method, from 85,165 dollars to roughly 170,165, and has changed nothing whatsoever about the company. The second method absorbs most of that, so in practice the damage is small. But it is not zero, and the fix costs nothing at the point when you are drafting the certificate rather than amending it.

There is a layer this piece does not cover. Delaware is where the company is registered. Where it operates is a separate question with separate registrations and separate fees, and for a company working out of California that second bill is larger than everything above put together. It deserves its own piece rather than a paragraph in this one.

What I could not check

The state's fee schedule changed on 1 August, three days before I wrote this. The link to the new schedule sits on the Division's own fee page and the file would not load for me on any attempt, across two networks and four tries, so I cannot tell you today what a certificate of incorporation costs to file. I would rather say that than repeat last year's number and have somebody budget from it.

I also cannot tell you how many companies pay the authorized shares figure without ever running the second calculation. Nobody publishes it and the state has no reason to. My suspicion is that the number is small among venture-backed companies, whose lawyers do this in their sleep, and much larger among people who incorporated themselves off a template and got a notice they were not expecting, but that is a guess with nothing behind it.

None of this is tax advice and I am not your accountant. A company with unusual stock, foreign owners or a mid-year conversion has facts this piece does not cover, and that is a conversation for somebody who does it professionally.

I keep thinking about that one sentence of 9 words. “Use the method that results in the lesser tax.” It is on the page. It has been on the page the whole time. It puts the entire burden of noticing on the person least likely to be reading a state tax page in February, and I read it four times myself before it meant anything at all.