What are shares of stock?

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.

According to Delaware law, every corporation, unless designated a non-stock corporation, is a for-profit general corporation and, as such, must have at least one class of common stock to evidence ownership.

When do I issue stock?

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.

Understanding Company Stocks | Harvard Business Services, Inc.

Q: What is no-par stock?

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.

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Understanding Delaware Company Stocks

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When you hear the word "stocks," it's easy to think of the public markets. But for business owners, stocks mean ownership, control, and the financial foundation of their company. In a Delaware corporation, stocks determine who owns what, how decisions are made, how you bring in partners or investors, and how profits are ultimately distributed. Whether you’re a solo founder or part of a growing team preparing for future investment, understanding company stock is essential.

What are Company Stocks?

Company stocks, or shares, represent units of ownership in a corporation. When you own stock in a company, you own a piece of that business and have certain rights, such as voting power or a share in profits, depending on the type of stock.

For Delaware corporations, stock begins with the Certificate of Incorporation, which outlines the company’s share structure. This document does not specify how many shares the company currently has in circulation. Instead, it sets the number of authorized shares, or the maximum number of shares the company is allowed to issue, as well as any classes of stock, such as common or preferred. If a company needs more flexibility in the future, it can increase its authorized shares by amending the Certificate of Incorporation.

Types of Stocks

While corporations can create several classes of stock, the two you’ll see most often are common stock and preferred stock, each serving a different role in the company’s ownership structure.

Common stock represents basic ownership in the company. Typically held by founders and early shareholders, these individuals usually have voting rights, allowing them to participate in major company decisions, but they are last in line when it comes to receiving payouts, such as dividends or proceeds from a sale of the company.

Preferred stock, on the other hand, is most often issued to investors and comes with certain advantages over common stock. These can include priority in receiving dividends, a higher claim on assets if the company is sold or liquidated, and sometimes additional rights or protections. However, preferred stockholders often have limited or no voting power compared to common stockholders.

No-Par Stocks

A no-par stock is a 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 1,500 shares of no-par stock fee-free.

Learn more about Delaware no-par stock and par value.

Issuing Stocks

Issuing stock is how a corporation actually puts ownership into the hands of investors. While your Certificate of Incorporation sets the framework, shares don’t represent ownership until they are formally issued. Deciding when and how to issue stock is one of the most important steps in shaping your company’s ownership and control.

When and how you choose to issue shares of stock for your Delaware corporation is entirely up to you. Most founders issue themselves common stock early in the formation process to establish clear ownership and demonstrate their stake in the business. 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 shareholder rights and special powers.

Setting Stock Prices

Unlike publicly traded companies, where stock prices fluctuate daily based on market activity, private companies have far more control over how their stock is priced. In a Delaware corporation, the stock price is typically determined at the time shares are issued and is approved by the board of directors. Several internal factors influence how a company sets its stock price, including financial performance, growth potential, assets, and overall business outlook. For early-stage companies, pricing is often based on founder judgment, comparable companies, or negotiations with investors rather than established market data.

Ultimately, while the market drives stock prices for publicly traded companies, private companies rely on internal decision-making and investor negotiations to determine share value.

Stock Dividends

After a successful quarter, a corporation may distribute stock dividends to its shareholders. Stock Dividends are a portion of a company's profits that are given to shareholders rather than being reinvested in the company. Stock dividends come in the form of additional stock, meaning that the process can have an impact on the stock price. Typically, the stock price will drop because the company is essentially paying out some of its cash to shareholders.

Regular dividend payments can indicate a company's financial health and confidence in its future performance. For investors seeking regular income, companies with a history of paying consistent dividends can be attractive.

How Much Stock Do You Need?

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 fewer, 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:

15,000 shares @ $5.00 each (par value) = $75,000
150,000 shares @ $0.50 each (par value) = $75,000
1,500,000 shares @ $0.05 each (par value) = $75,000
15,000,000 shares @ $0.005 each (par value) = $75,000

Be sure to include all classes of stock, including common and preferred stock, when utilizing the above formula.

Company Stock FAQs

Where do I get stock certificates and other supplies for my company?

Many modern corporations no longer rely on physical certificates and instead use electronic recordkeeping or cap table management software. Regardless of format, it’s important to maintain accurate records of stock issuances.

At Harvard Business Services, Inc., our Standard Incorporation Package contains a company kit that includes 20 stock certificates for your company. If you need additional stock certificates, please call us at 1-800-345-CORP or email us.

Can an LLC issue stock?

An LLC cannot issue stock. LLCs are structured differently from corporations and aren’t able to generate capital the same way that corporations can. If you plan to raise capital through traditional equity investors or issue stock-based compensation, a corporation is typically the preferred structure.

Can a business invest in stock?

Yes, a business can invest in stock, including shares of other companies, as part of its financial strategy. However, these decisions should align with the company’s governing documents and business objectives. It’s also important to consider tax implications and any restrictions in your operating agreement or corporate bylaws before making investment decisions.

For more information about how to issue shares of stock in a Delaware corporation, please feel free to give us a call at 1-800-345-CORP or email us at info@delawareinc.com.

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