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One of the benefits of incorporating a company in the state of Delaware is the flexibility of the corporate structure.
Regardless of the reason you may need to amend your company stock, if you own a Delaware company, you possess the ability to quickly and easily make changes to your business entity’s charter in order to meet your needs.
You can increase or decrease the number of shares your Delaware company has authorized; you can also add or remove classes of stock and/or modify the par value of the stock.
For example, let’s say you and your business partner decide to start a new company. Since it’s just you two as owners, the ownership will be split 50/50, evenly. In order to keep things simple, your company initially authorizes 2,000 shares of common stock, and each partner receives 1,000 shares.
Now fast forward a couple of years to when your business is rapidly expanding. You both want to bring in additional people to be part of your company’s internal organization, so you’ll need to find a way to increase the number of your company’s authorized shares.
Perhaps you need to add another class of stock, such as preferred shares, so that the original owners will own the class of preferred stock while the new people can buy shares of common stock in the company.
On the flip side, if you had originally formed a company with 2,500,000 authorized shares because you were expecting numerous investors but, due to unexpected circumstances, your company didn’t flourish as you’d hoped it would.
You still want to keep the company, but on a much smaller scale; thus, you need to reduce the stock structure of the company in order to accommodate its current status.
Further to this example, a company with 2,500,000 authorized shares will receive a large Franchise Tax notice from the state of Delaware. The state uses one of two methods to calculate annual Franchise Tax Fees, and the first method, the Authorized Shares Method, is how the state always sends the notices.
Typically, you can file your company’s annual report via the Assumed Par Value Capital Method (aka the Alternative Method), and pay a significantly lower amount than via the first method. You can ascertain how much your company’s Franchise Tax fees will be via each method using our Franchise Tax calculator.
If you and your new team don’t want to bother with the calculations each year to try and pay a lower amount of Franchise Tax, you may determine it is in the best interest of the company to simply reduce the number of authorized shares, which will result in Delaware imposing a flat Franchise Tax Fee on your company each year.
Next, file a Certificate of Amendment with the Delaware Secretary of State’s office. This Certificate indicates that an authorized officer of your company has authorized a change of the stock structure.
The new details of the number of authorized shares, classes of stock and/or par value should be listed on the Certificate. The document must be signed by an Authorized Officer of the company.
When the Certificate is filed with the Delaware Secretary of State, your stock amendment will officially become effective.
The important thing to remember is that, as the owner of a Delaware company, you are not limited in how many stock amendments can be filed for your business entity. You have the option to adjust the structure of your business as it develops and evolves.
THE AUTHOR OF THIS BLOG ARTICLE IS NOT A LAWYER AND HARVARD BUSINESS SERVICES, INC. IS NOT A LAW FIRM. THE ARTICLE ABOVE IS NOT INTENDED AS LEGAL ADVICE AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. THIS SHORT ARTICLE IS STRICTLY TO MENTION SOME ASPECTS OF DELAWARE’S CORPORATION LAWS AND/OR LAWS RELATING TO OTHER FORMS OF ENTITIES WHICH YOU MAY NOT BE FAMILIAR WITH. WE RECOMMEND THAT YOU CONSULT WITH A LAWYER BEFORE FORMULATING A STRATEGY WHICH WILL BE SUITABLE FOR YOUR SPECIFIC CASE.