We are a startup that incorporated in Delaware. We have 10MM authorized shares and 100,000 issued shares. From the rules for calculating Delaware franchise tax (using assumed par value method), it seems like every $10,000 in gross assets will become $1M in "assumed par value capital", and add $350 to the franchise tax bill. Is this correct? If so, what's the best way to mitigate this (e.g. de-authorize shares)? What about a stock split?

ANSWER

The BIDaWIZ Team's Answer:

You are correct that for every $10,000 in gross assets per the stated fact pattern, the assumed par value calculation results in an additional $350 in franchise taxes.

Technically, you can reduce the number of shares authorized by filing an amendment to your articles of incorporation. Please note that the lower number of authorized shares are only in effect as of the filing date. This is referenced in Title 8, Chapter 1, Section 241 of the Delaware Code here.

With a stock split, the company would still need to make an amendment. There was a recent court case in which the company in question failed to meet the standards detailed in Delaware Section 242 -> Blades v. Wisehart, et al., C.A. No. 5317-VCS (Del. Ch. Nov. 17, 2010) (Vice Chancellor Strine).

References: Delaware Administrative Code Title 8, Chapter 1, Section 241
State: Delaware