One of the questions you’ll be asked when incorporating a Delaware company will be, “How many authorized shares would you like?”
This question is important because this information is listed on your Certificate of Incorporation and filed with the state of Delaware.
The answer to this question will affect your annual Franchise Tax as well as your ability to receive investment funds by selling shares of stock. Most companies, when starting out, will keep the number of authorized shares and par value very low.
The most common amount we see is 1500 shares at .01 par value. This allows the company to pay the minimum annual Franchise Tax, and it is beneficial to start-up companies that may not have a lot of income and therefore need to minimize expenses.
As the company grows, it is typical for a company to amend the number of authorized shares.
Let’s look at a specific scenario:
Bob forms a corporation in order to start an online retail site for a new type of salt that makes any food healthy. He would like the company to be called Bob’s Healthy Seasoning, Inc. Bob has limited funds and is the company’s sole employee.
He is concerned about the cost of his annual Franchise Tax so he chooses a low number of authorized shares, which allows him to pay the minimum Franchise Tax.
He chooses 5000 authorized shares because it is the most shares he can authorize yet still pay the minimum Franchise Tax. Three years later, Bob has an office and 10 employees, and he has issued some of the shares to different investors in order to gain capital.
His business is growing, and Bob needs more capital. He decides he needs to authorize more shares in order to attract more investors and obtain more capital so he can upgrade his computer system, buy larger office space and hire more employees.
He contacts his Registered Agent and requests to amend the number of authorized shares from 5000 shares, which will allow for more investors. Bob creates a separate class of 1,000,000 shares. Now he can use these additional shares, even though they are of a different class with different voting rights, to raise additional funds.
He also decides to change his company name, as it now not only creates seasonings but also sauces, dressings and juices.
Bob files a name change amendment, renaming his business Bob’s Healthy Everything, Inc. Now his company has a new name and a new amount of authorized shares, but it is the same company.
This scenario is very common in business. Take Facebook, Inc. for example. When Facebook, Inc. was formed in 2004, the company started out with 100,000 authorized shares and its original name was The Facebook, Inc.
Since 2004, Facebook has made approximately 18 amendments to its Articles of Incorporation. Some of those amendments include changing the number of authorized shares and changing the name from The Facebook to Facebook.
Changes like these, especially increasing the amount of authorized shares, are not uncommon.
Facebook now has 5,000,000,000 common class A shares; 4,141,000,000 common class B shares; and 100,000,000 preferred shares. Quite an increase for a company that started with 100,000 authorized shares.
These are just two examples of how companies grow and need to make changes to their Articles of Incorporation. Goals are achieved, the market changes, customer interest changes and investor demand changes are all reasons why companies have to adapt.
Whether your company needs a small change, such as a name change or an increase in authorized shares, or a major change, such as a merger, amendments can be made to your company’s original Certificate of Incorporation.