Delaware has long been the go-to state for SaaS founders and technology startups to incorporate. Its business-friendly laws, well-established court system, and investor familiarity make it a top choice for venture-backed companies.
But with those advantages comes an important — and sometimes overlooked — obligation: the Delaware Franchise Tax.
Many founders mistakenly assume “franchise tax” means they need to be operating a “franchise” type of business. However, in reality, it’s an annual fee for the privilege of being incorporated in Delaware, and not filing or paying your franchise taxes can lead to costly penalties or even the loss of your company’s good standing.
What Is the Delaware Franchise Tax?
The Delaware Franchise Tax is not based on your company’s revenue or profits. Instead, it’s a state-imposed fee on corporations and LLCs for maintaining their legal status in Delaware.
If you’ve formed a Delaware C corporation — the most common structure for SaaS startups — you must file an Annual Franchise Tax Report and pay the corresponding tax by March 1 each year.
How the Tax Is Calculated
Delaware uses a corporation’s equity information to calculate the fee.
Two primary methods to calculate franchise tax for corporations are:
- Authorized Shares Method
- Based on the total number of shares your corporation has authorized in its charter.
- This method often results in a higher tax for companies with large numbers of authorized shares (common in VC-backed startups).
- Assumed Par Value Capital Method
- Based on your issued shares and total gross assets as reported on your U.S. corporate income tax return.
- This method typically produces a lower tax bill and is often preferable for early-stage SaaS companies.
The tax can range from a minimum of $175 to a maximum amount of $200,000 (for large corporations).
Tip: Even if your startup has no revenue, you still owe at least the minimum franchise tax each year.
Why Many SaaS Founders Get Caught Off Guard
It’s easy to overlook the Delaware Franchise Tax, especially if:
- Your company operates out of another state (like California or New York)
- You assume your registered agent will handle all filings automatically
- You’ve recently incorporated and haven’t yet set up a compliance calendar
Failure to file by March 1 can result in:
- $200 penalty plus 1.5% monthly interest on the unpaid balance
- Loss of “Good Standing” status, which can delay funding rounds or due diligence
- Administrative dissolution if left unaddressed
How to File and Pay
You can file your Delaware Annual Report and pay your Franchise Tax online via the Delaware Division of Corporations website.
You’ll need:
- Your Delaware file number
- Basic company information (officers and directors)
- Financial data (if using the par value method)
Other States May Still Require Filings
Even if you’re incorporated in Delaware, you must also register as a “foreign corporation” in your home state — where your business physically operates or employs staff.
For example, a SaaS company incorporated in Delaware but operating in New York must:
- File Delaware franchise taxes annually, and
- File New York state reports and taxes as a foreign corporation.
Ignoring either can cause administrative headaches, missed filings, or duplicate notices.
Best Practices for SaaS Founders
Mark March 1 on your compliance calendar — file early to avoid penalties.
Work with your CPA to determine the most cost-effective filing method.
Keep accurate records of authorized vs. issued shares and total assets.
Stay compliant in all states where you operate, not just where you’re formed.
Why It Matters
Incorporating in Delaware brings real advantages for SaaS startups — but it also comes with annual maintenance requirements.
By understanding how franchise taxes work and planning ahead, you can:
- Stay in good standing with the state,
- Avoid unnecessary penalties, and
- Keep investors and legal counsel confident in your corporate compliance.
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About Herod CPA PLLC
Herod CPA PLLC helps SaaS founders and finance teams manage FP&A, accounting, tax, and compliance for venture-backed companies.
Contact us at info@herod.cpa or follow us on LinkedIn for more information.