Delaware Tax Bills Spark Concern Among Startup Founders

Founders of early-stage companies are expressing alarm over unexpected and substantial tax bills originating from Delaware, a state popular for incorporation. Reports surfaced on social media over the weekend, with several founders sharing screenshots of tax demands exceeding $100,000.

The Issue

The core of the issue appears to be related to franchise tax assessments. Delaware levies a franchise tax on corporations, even those that are not actively conducting business within the state. The tax is calculated based on an authorized shares method or a shared value method, and recent assessments have caught many startups off guard.

David Phillips’ Experience

David J. Phillips, CEO at Fondo – a company providing accounting and tax services for startups, highlighted the issue on LinkedIn and X (formerly Twitter). He shared an example of a $143,000 tax bill received by one of his clients. Phillips emphasized the importance of proper bookkeeping and accounting practices to avoid such surprises. LinkedIn Post, X Post

Delaware Franchise Tax Explained

Delaware’s franchise tax is an annual fee corporations must pay to maintain their good standing. The amount due depends on the method of calculation used by the state. The authorized shares method is generally more favorable for companies with a large number of authorized but unissued shares. The shared value method, which assesses tax based on the value of outstanding stock, can result in significantly higher bills, particularly for companies that have experienced valuation increases.

Why Now?

The recent surge in tax bills may be attributed to increased scrutiny from Delaware tax authorities and a backlog of assessments following the pandemic. The rising valuations of many startups in recent years likely contribute to higher tax liabilities under the shared value method.

What Should Founders Do?

Founders receiving unexpected Delaware tax bills are advised to:

• Review the Assessment: Carefully examine the tax assessment to understand the basis for the calculation.
• Consult with a Tax Professional: Seek guidance from a qualified tax advisor specializing in Delaware corporate tax law.
• Explore Options for Appeal: If the assessment is inaccurate or excessive, explore options for filing an appeal with the Delaware Division of Corporations.
• Ensure Accurate Record Keeping: Maintain meticulous records of authorized shares, stock valuations, and other relevant financial information.

Background on David Phillips

David Phillips is an American civil engineer and entrepreneur known for strategically accumulating frequent flyer miles through a Healthy Choice Foods promotion in 1999. He currently serves as the associate vice president of energy and sustainability at the University of California. Wikipedia