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Find out why you need stock, how much you should have, when to issue it, the differences between preferred stock and common stock, and where you can get stock certificates and other related supplies for your company.
(Want more general incorporation information? Please visit our Learning Center.)
Shares of stock are units of equity ownership in a corporation. They are first authorized by the company’s Certificate of Incorporation (or later amendments) that state the number of shares the company has in total.
"Authorized" means the total number the corporation can own or sell. If a majority of directors and stockholders approve, the number of shares can be raised and the corporation may sell them to raise capital as often as it needs to.
The term "issued shares" refers to the number of authorized shares that have actually been issued to individuals or corporate owners of the company including founders, managers, insiders and investors.
Stock in private companies is valued differently than stock in public companies.
There are five types of Delaware corporations: general corporations, close corporations, non-stock corporations, public benefit corporations and S corporations. There is also the Delaware limited liability company (LLC).
Here is a quick overview of their stock requirements:
No-par stock is stock that is essentially issued without a face value. It can be issued to shareholders without the exchange of funds, goods or services.
Having no par value will not restrict the selling of your shares to investors at the price determined by the Board of Directors and accepted by the investor (just like shares that do have a par value).
It should be noted that some U.S. states do not allow corporations to issue no-par stock.
Fortunately, Delaware is not one of those states. The Delaware Division of Corporations allows Delaware general corporations to hold up to to 1,500 shares of no-par stock fee-free.
Learn more about Delaware no-par stock and par value.
When and how you choose to issue stock to your investors is entirely up to you. Obviously, you will want to issue yourself common stock early in the organization process to help prove your ownership and interest in the company.
If you have other initial investors, they will also expect to receive common stock early in the formation of the corporation. As you attract more investors, you can continue to issue common stock as your circumstances require.
When you find you are issuing common stock to investors more liberally, it might be a good time to consider issuing preferred stock to yourself and your senior investors in order to preserve exclusive rights and special powers.
If you need additional stock certificates, please call us at 1-800-345-CORP or email us.
Since the annual Delaware Franchise Tax fees for stock corporations are based on the number of stock shares and their par value, it is best to keep both of these as low as you can.
If your stock corporation has 5,000 authorized shares or less, you are considered a minimum stock corporation and are only required to pay a minimum annual Franchise Tax of $175, in addition to an annual report filing fee of $50.
If your stock corporation has a total of 5,001 authorized shares or more, you are required to file an annual report (a $50 fee), and you must also pay an annual Franchise Tax on the total number of authorized shares your company owns. (Learn more about Delaware Franchise Tax fees.)
While you can have up to 5,000 authorized shares and still be considered a minimum stock corporation, many attorneys recommend you begin with 1,500 shares of no-par stock because placing a small par value on your stock can save you from a significant tax bite. There are also additional filing fees associated with filing more than 1,500 no-par shares.
If you choose to issue par-value stock, in order to avoid additional formation fees, your total equity valuation (the number of shares multiplied by par value) must not exceed $75,000 in order to stay within the minimum initial filing fee.
Accordingly, all of the share configurations below are allowed within the minimum initial tax:
Be sure to include all classes of stock, including common and preferred stock, when utilizing the above formula.
For more information about stock types, share amounts or Franchise Taxes, please feel free to give us a call at 1-800-345-CORP or email us at firstname.lastname@example.org.
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The HBS Blog offers insight on Delaware corporations and LLCs as well as information about entrepreneurship, startups and general business topics.
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