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, such as 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 be authorizing for my corporation?" Some of you may also wonder, "At what par value do I authorize the stock for the corporation?" Just as a quick reminder, 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 shares.
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, whenever possible, it is best to keep the number of shares low. A good rule of thumb is to authorize only what the corporation will need. Corporations with 5,000 or less authorized shares are considered minimum stock and will pay the minimum Delaware Franchise Tax each year. If you must exceed 5,000 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, which 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 you need more than 5,000 authorized shares for your corporation, the Delaware Franchise Tax calculation is no longer a matter of consequence, and now the focus shifts to the par value assigned to the shares. If you must exceed 5,000 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, it is generally 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 5,000 authorized shares will want to assign a par value to the shares to avoid additional filing fees levied by the Delaware Division of Corporations. Delaware law allows for 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 than $75,000, the corporation will not experience any additional filing fees at the time of incorporation.
Classes of Stock – Although 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.
Want more information? Please visit our page on understanding your company's stock.
[Photo credit: William Creswell ]