Authorizing Shares for Your Delaware Corporation
Filed Under: INC Knowledge, Stock
Tags: Delaware, Stock
Back in February, our chairman wrote one of his first blog articles on shares of stock entitled, Demystifying Stock. In it he defines “Stock” and some of the terms commonly associated with stock, like Authorized Shares. Reading his article should give you a better understanding of the definition of stock, but it may still leave you wondering, “How many shares of stock should I authorize for my corporation?” And some of you may still wonder further, “At what par value do I authorize the stock for the corporation?” Just as a quick refresher, Authorized Shares are the total number of shares that a corporation may sell or trade, and are defined at the time of filing the Certificate of Incorporation. When authorizing shares, the corporation must define the quantity, the par value and the classes for the authorized shares. Though not an exact science, here are some general considerations when deciding how many shares to authorize for a Delaware Corporation.
Quantity – When authorizing shares for a Delaware Corporation, one should consider that the annual Delaware Franchise Taxes will be based on the number of shares; therefore, when possible, it is best to keep the number of authorized shares low. A good rule of thumb is to authorize only what the corporation will need. Corporations with 5000 or less authorized shares are considered “minimum stock” and will pay the minimum Delaware Franchise tax each year. If you must exceed 5000 authorized shares your corporation will be classified as a “maximum stock” and you will be afforded the opportunity to recalculate the company’s Franchise Tax using a complicated formula called the “Assumed Par Value Capital Method” that will consider the company’s gross assets and the number of issued shares at the end of the year.
Par Value and Share Valuation – If you decide that you need more than 5000 authorized shares for your corporation, the Delaware Franchise Tax calculation is no longer a matter of consequence, and now the focus should shift to the par value assigned to the shares. If you must exceed 5000 shares, the next threshold for you to consider is a share valuation of $75,000. Share valuation is simply the number of Authorized Shares multiplied by the Par value. Par value is only relative to the bottom value of the share, and has no bearing on the “market value” or “stock price” of the share. As with the number of authorized shares, generally it will be better to keep the par value as low as possible because the initial filing fees will be calculated based on the share valuation. “Minimum Stock” Corporations may consider a zero par value, but corporations in excess of 5000 authorized shares will want to assign a par value to the shares to avoid additional filing fees levied by Delaware Division of Corporations. Delaware Law will allow a par value as small as $0.000001, thus making it very easy to manipulate your company’s share valuation to remain below the $75,000 threshold. For example, if you decide you need 1,000,000 authorized shares you can assign a par value of $0.001 which will result in a share valuation (1,000,000 shares x $0.001 par value) of $1,000. Because the share valuation is less the $75,000, the corporation will not experience any additional filing fees at the time of incorporation.
Classes of Stock – Though the classes of shares have no direct influence on the Delaware Franchise Tax, it is still important to mention. For most corporations the share class will be “Common” but the scope of Authorized Shares includes all classes (i.e. Common and Preferred). Therefore, it is important to remember that when you are considering the quantity of authorized shares or calculating the share valuation that the authorized shares are all shares combined, both common and preferred.
YES I AM INQUIRING ABOUT STOCK AND IS WONDERING IF I WAS TO ASK FOR 5000 SHARES OF STOCK AT $.25 PER SHARE WOULD THIS BE OK WHEN I AM GETTING A GENERAL CORPORATE PACKAGE AND WHAT PERCENTAGE DO I PAY PER SHARE?
In response to Excell Morris, you may certainly set up your general corporation in Delaware with 5000 shares at a $.25 par value. At the time of incorporation you would not be charged any additional fees for authorizing the shares and you are not expected to pay any capital until a shareholder meeting is held. After Harvard Business Services completes the incorporation service, typically the initial shareholders for a corporation will conduct a meeting in which shares could be issued to the shareholders. Based on your presented scenario, you would be expected to pay $.25 per share that you were to purchase from the corporation. For you to own all 5000 shares you would need to pay the corporation $1250 because the shares were authorized at a par value of $.25
I would like to know if I am incorporating with more than 5000 shares with a par value of 0.00001 would it be accepted and in that case how the share certificates are issued. Assuming that myself and my wife are going to be the investors of the corporation initially. I would appreciate an immediate and detailed reply on this which would help me in taking the right decision.
Regards
Prometheus
In response to Prometheus’ question: A corporation may authorize more than 5000 shares at a par value of $0.00001 and not experience any additional fee initially; however, bear in mind that if more than 5000 shares are authorized, the corporation will no longer be considered a minimum stock corporation in Delaware, so the franchise tax amount will increase to a minimum of $400.
When issuing shares of stock, typically a corporation’s board of directors with hold a meeting to issue shares of stock to the shareholders. The initial shareholders will need to pay at least the par value for each share. The sale of the shares are typically documented through meeting minutes, board resolutions, stock certificates and a stock transfer ledger. A corporate kit from Harvard Business Services can help streamline this process because it contains pre-formatted materials which will make issuing stock much easier to document.
Hi, I am getting ready to start a Delaware Corp. with some friends. We don’t have a lot of capital yet, but we are planning to issue stocks to raise capital, we were thinking of authorizing 1,000,000 shares @ $0.01 par value for a total of $10K. I know the first year’s tax is minimal, however,I don’t want to get a $180K franchise tax the following year. What are my options? Is it up to us to choose the taxing method (whether the authorized share method or the assumed par value method)My question: is a million shares a lot to start with, assuming our assets will be between 2-10 million in a few years. I will finalize my decision after I hear from you, and will definitely use your company as our agent. Thanks.
Hi Jim,
Thanks for your question. Give us a call and we can discuss your options in more detail, 1-302-645-7400. Ask for Brett Melson.
We are an LLC and I am the managing member. I want to issue stock/ownership certificates to all three members, but as we are not a corporation, is this recommended? How else do we verify ownership? Do we need to be a ‘series LLC’ (I just saw that mentioned in an article I read on you site)? What is best for our purposes?
We are just getting started (on a shoestring, of course). Two of the members have invested their time and financial resources while another has invested his talents and time in equal measure.
The ownership, operations and management of the LLC are governed by a written agreement among its owners that is not required to be publicly filed or disclosed to the Delaware Division of Corporations. As a result, an LLC allows secure anonymity and the ability to create a customized management structure, which prescribes the economic relationship among owners.
If you haven’t drafted an operating agreement yet, it sounds like it’s time. Harvard Business Services offers LLC Company kits, customizable operating agreements or even online agreements. For more information give our sales team a call, 800-345-2677 option 1.