What are some tax considerations startups should make when issuing their initial equity?
Another reason a startup with 10 million authorized shares will want to issue a standard equity allocation is to reduce the amount of annual franchise taxes it will owe the State of Delaware. Delaware corporations are required to pay annual franchise taxes in order to remain in good standing.
Delaware’s standard method of franchise tax calculation assesses value through the Authorized Shares Method, which is a simple formula that assesses tax by the number of authorized shares in a company. For a 10 million share startup, this will be a five-digit tax bill.
An accepted, alternative way to calculate your taxes is the Assumed Par Value Capital Method, which is based on the actual value of your startup. If you’ve just incorporated, the actual value of your startup may be low, which would result in a lower tax obligation. It's important to note that the minimum franchise tax payment is $450. Issuing enough shares is an important way to make sure that the corporation’s franchise tax bill will be at or close to the minimum franchise tax obligation for the first few years of operation.
Last updated on April 2, 2019