Delaware Capital Structure: Authorized Shares and Franchise Tax

When you incorporate in Delaware, your capital structure starts with two numbers written into the certificate of incorporation: how many shares the company is authorized to issue, and what par value each share carries. Both choices sound like formalities. Neither is. Together they set your annual franchise tax bill, define how much room you have to raise money before amending the charter, and determine how much of your paid-in capital is available to pay dividends later. The standard answer for a Delaware startup is roughly 10 million authorized shares at $0.0001 or $0.001 par value, and the reasoning behind that answer is worth understanding before you copy it.

What Authorized Shares Actually Do

Every Delaware corporation must state a total number of shares it can issue in its certificate of incorporation.¹ That figure is a ceiling. The company can issue stock up to that number without going back to stockholders. Any issuance above it requires a charter amendment, which means a board resolution declaring the amendment advisable followed by a stockholder vote.²

At formation, when the cap table has two founders and a lawyer, that amendment is easy. Once you have investors, employees with option grants, and preferred stockholders with veto rights over charter changes, it stops being easy. The reason startups authorize around 10 million shares at incorporation is to leave enough headroom for founder splits, an employee option pool, and one or two priced financing rounds without another vote.

Pick too low and you’ll amend under pressure later. Pick too high and, depending on how you set par value, you may hand yourself a large tax bill.

What Par Value Actually Does

Par value is the minimum price at which a corporation can sell a share. Delaware requires the certificate of incorporation to state the par value of each class, or to declare that the shares have no par value.¹ Historically it protected creditors by preventing giveaway issuances. Today it’s mostly a formality with two live consequences: your franchise tax and your ability to pay dividends.

Most Delaware startups set par value at $0.0001 or $0.001 per share. Higher par values still work but reduce flexibility for no benefit most companies need. Zero-par (no-par) stock is legal but has a specific tax consequence, described below.

How the Two Numbers Drive Your Franchise Tax

Delaware calculates franchise tax two ways and lets you pay the lower of the two.³ The authorized share count and the par value each feed into a different method, and that’s why the two choices have to be made together.

Authorized Shares Method

Under this method, the tax scales with the number of authorized shares. A corporation with 5,000 shares or fewer pays the $175 minimum. From 5,001 to 10,000 shares the tax is $250. Each additional 10,000 shares, or fraction, adds $85, up to a $200,000 cap.³ Corporations identified as large corporate filers face a maximum of $250,000.⁴ A company with 10 million authorized shares owes a substantial amount under this method. That’s the problem the second method solves.

Assumed Par Value Capital Method

Under this method, the rate is $400 per $1 million (or fraction) of assumed par value capital, with a $400 minimum. The formula factors in issued shares, authorized shares, and total gross assets from the corporation’s federal tax return.³ A very low par value shrinks the assumed capital figure, which is why a startup with 10 million authorized shares at $0.0001 par typically owes far less under this method than the Authorized Shares Method would produce.

One important interaction: if a corporation has no-par stock, the Authorized Shares Method will always produce the lower tax.³ Choosing no par value therefore closes off the escape hatch that a very low positive par value keeps open. That’s why the standard startup answer is a tiny positive par value rather than none at all.

Par Value and Dividend Capacity

Par value also draws the line between “capital” and “surplus” on the books. When shares are sold, the board designates how much of the consideration is treated as capital, but that amount can never be less than the aggregate par value of the shares issued.⁵ Everything above that goes into surplus.

That matters because Delaware lets a corporation pay dividends only from two sources: surplus, or (if there is no surplus) net profits for the current or immediately preceding fiscal year.⁶ Set par value high and you lock more of what stockholders paid into stated capital, shrinking the surplus you can pay out later. Set it low and almost everything received above par lands in surplus. For a company that ever expects to pay dividends or buy back stock, that’s another reason to keep par value tiny.

What You Can Accept for Shares

Once authorized shares and par value are set, the board has broad discretion over what to take in exchange for stock. Delaware permits issuance for cash, tangible or intangible property, or any benefit to the corporation, including services.⁷ A founder can receive stock in exchange for assigning intellectual property or committing to future services without paying cash.

When stock is received for services, the IRS treats the fair market value of the stock as ordinary income in the year the stock vests, unless the recipient files a Section 83(b) election.⁸ That election must be filed within 30 days of the stock transfer.⁹ There is no extension and no way to file late. Missing that window is one of the more expensive mistakes founders and early employees make, because it locks them into paying tax on higher values as the stock vests.

Changing Authorized Shares or Par Value Later

Both figures live in the certificate of incorporation, so changing either means amending the charter: board resolution declaring the amendment advisable, followed by a stockholder vote.² The default threshold is a majority of the outstanding shares entitled to vote, and the charter or bylaws can raise that bar.

Forward Splits

Delaware carves out a shortcut for forward stock splits. If the corporation has only one class of stock outstanding and that class is not divided into series, the board can subdivide issued shares into a greater number without a stockholder vote, and the same amendment can proportionally increase the authorized number to match.² The shortcut disappears if the certificate of incorporation says otherwise.

Reverse Splits

Reverse splits require a stockholder vote. For corporations whose shares are listed on a national securities exchange, the threshold is relaxed: votes cast in favor need only exceed votes cast against, rather than requiring a majority of all outstanding shares.² The company must still meet the exchange’s minimum-holder listing requirements after the amendment. Unlisted corporations don’t get the reduced threshold.

Filing Fees

Any charter amendment is filed with the Delaware Division of Corporations on a Certificate of Amendment. The minimum filing fee is $214 for a one-page document, with $9 for each additional page.¹⁰ An amendment that increases authorized stock can cost more, because the statutory fee structure scales with the number of shares being added.¹¹ Any change in authorized shares or par value has to flow through to the next annual franchise tax report, due by March 1.

Getting the Numbers Wrong

Issuing More Shares Than Authorized

If a corporation issues more shares than its charter authorizes, those shares are void under Delaware law and confer no rights on the recipients. This isn’t a paperwork problem you patch later with a quick amendment. The Delaware Court of Chancery has required corporations to unwind transactions built on unauthorized issuances, and directors who approved the issuance can face fiduciary duty claims. The safeguard is boring but essential: track issued shares against the authorized ceiling before every grant or sale.

Dividends and Buybacks That Impair Capital

Delaware prohibits a corporation from repurchasing its own shares when doing so would impair its capital, meaning push net assets below stated capital.¹² Dividends face the same test: surplus, or net profits for the current or preceding fiscal year.⁶ Directors who approve unlawful dividends or repurchases are personally jointly and severally liable for the full amount, plus interest, and a claim can be brought within six years. Directors who were absent or formally dissented can be exonerated, but inattention is not a defense: the statute covers willful and negligent violations alike.⁷ Closely held corporations, where the line between the company’s money and the founders’ money can blur, are where these claims most often surface.

Franchise Tax Falling Behind

Changing capital structure without updating franchise tax filings triggers penalties and interest. Fall far enough behind and Delaware can administratively dissolve the corporation; reinstatement requires paying back taxes, penalties, and a reinstatement fee. The annual report figures must reflect current authorized shares, issued shares, and gross assets, so any amendment that touches those numbers needs to flow through to the next filing.

1
Delaware Code Online. Delaware Code Title 8 – Corporations
2
Delaware Code Online. Delaware Code Title 8 – Subchapter VIII Amendment of Certificate of Incorporation
3
Delaware Division of Corporations. How to Calculate Franchise Taxes
4
Delaware Division of Corporations. Annual Report and Tax Instructions
5
Justia. Delaware Code 154 – Determination of Amount of Capital; Capital, Surplus and Net Assets Defined
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Justia. Delaware Code 8-170 – Dividends; Payment; Wasting Asset Corporations
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Delaware Code Online. Delaware Code Title 8 Chapter 1 Subchapter V – Stock and Dividends
8
Internal Revenue Service. Topic No. 427, Stock Options
9
Internal Revenue Service. Instructions for Form 15620, Section 83(b) Election
10
Delaware Department of State. Certificate of Amendment for Stock Corporation
11
Justia. Delaware Code 391 – Amounts Payable to Secretary of State Upon Filing Certificate or Other Paper
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Justia. Delaware Code 160 – Corporation’s Powers Respecting Ownership, Voting, Etc., of Its Own Stock