Par Value – How Low Can You Go?
Filed Under: INC Knowledge
Tags: INC Knowledge, Par Value
When referring to shares of stock in a Delaware company, par value is the bottom or lowest limit set to the value of a share of stock in a corporation. A share may not be bought, sold or traded for less than the par value. Simply stated, if the par value of a share is $1.00, then it cannot be issued to an investor for less than a dollar, paid for in funds or services. Par value sets only your bottom limit, but the Board of Directors may set the price of stock at any amount above par. Let’s say your par value is $.01 but the Board of Directors sells stock to an investor for $5.00 per share. This is perfectly legal. The board may ask any price and the investor pays what the market will bear. But keep in mind that you are selling some percentage of your corporation with each share you issue or sell.
If you’ve shopped around for an online incorporator, you might have noticed that they will often suggest a par value of zero. Why do they do this? Realizing that many people who are just starting their incorporations are small start-ups companies, incorporators suggest low to no par value so that the owners or initial shareholders will not need to make substantial investments into the corporations in order to own their companies at the time of organization. In the case of “no par” shares, they may be issued to the shareholders without the exchange of funds, goods or services. Having no par value will not restrict you in selling your shares to investors at the price determined by the Board, and accepted by the investor, just like shares that do have a par value. Ultimately a share is worth what an investor is willing to pay for it.
Even though No Par stock sounds great, it is not for everyone. In many cases, corporations will want to assign a par value so that an investment (whether it be funds or services) is required in order to own a share in the company. This will help a corporation generate investment revenue for growth and/or help to recoup startup costs. Also, some states may have limitations to the number of shares that may be offered at no par, or charge additional filing fees and/or taxes based on the number of shares authorized at zero par. For instance, Delaware’s Division of Corporations will allow up to 1,500 shares of no par stock before you will begin to experience additional filing fees. In addition, franchise taxes for large amounts of no par stock (in excess of 5000 authorized shares) can prove to be very expensive.
If you have concerns about the impact of the number of authorized shares or the impact of the par value on your filing fees or franchise tax in Delaware, please feel free to give us a call or send us an email.
I just love your blog, the information I find here is remarkable! Keep up the great work Harvard Business Services,Inc.
Is the $250 the only tax we need to pay on the income from our LLC?
We do not need to file with the local tax for our LLC income?
Not sure how this works…
Thanks
The Franchise Tax for an LLC formed in Delaware is a flat rate fee; currently that fee is $250. Income plays no role in the evaluation of an LLC’s Franchise Tax amount in Delaware. For clarification on Franchise Tax check out this previous post, http://blog.delawareinc.com/2009/12/clarification-on-franchise-tax/
Aside from the LLC’s annual responsibility to file federal income taxes with the IRS, additional income tax filings may need to be made in the State, and even the city where the LLC physically conducts its business. Typically, LLC’s formed in Delaware but with no physical activity (i.e. store front, banking, etc.)in Delaware will not pay income tax to Delaware, but instead pay that to the state where physically located. For further information about local taxation, we strongly suggest that you seek the assistance of a tax professional in your area.
Hello Paul,
First of all, thank you very much for the service provides through HBS.
I recently incorporated and doing the initial balance sheet to disclose the contributions in investments (assets/cash).
It is a small company with conservatively 50K in combined startup assets which likely will raise in value due to the projected income.
I am looking to get some investors to sell a portion of the business (30%) and rise some capital capital on the way, but I have few questions:
-Since there is a starting set value of the company, do I need to change the Par Value in the Certificate of Incorporation/Stock Certificates in order to require a minimum amount of cash for outside investors?
-By doing so, does this change will impact the Delaware Franchise Tax and my state corporate taxes? I want to keep the same number of shares (1,500)
-Will this change also imply additional filling fees?
-On the other hand if there is no need to change anything (Certificate of Incorporation or Stock Certificates) can the current valuation of the company be kept internally and the board decide the sale price?
Thank you very much in advance,
Rafael
Rafael, your last bullet point pretty much sums it up. Your Certificate of Incorporation authorized 1500 shares at a particular value, but remember the par value is only setting the bottom limit that you may buy, sell, or trade the share for.
When it comes time to seek outside investors, the corporation’s directors may take into consideration the company’s current valuation and set the sale price accordingly. Changes to sale price of the shares do not require the Certficate of Incorporation to be changed. However; if the board decided to increase the par value of the authorized shares, or authorize additional shares, then an amendment to the Certificate of Incorporation will be necessary.
Explained very well. I was searching for this all over the internet but the scneario in your example with details was very well explained.
I am happy to have used Harvard Business for my registered agent service. I guess I should use your blog more often.
Go Delawareinc Go !