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One of the benefits of incorporating a company in Delaware is the flexibility of the corporate structure.
With stock amendments, 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. We've provided steps to making stock amendments later in this article.
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.
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 evenly, 50/50. 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, maybe 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.
In order to make stock amendments, follow these steps:
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.
*Disclaimer*: Harvard Business Services, Inc. is neither a law firm nor an accounting firm and, even in cases where the author is an attorney, or a tax professional, nothing in this article constitutes legal or tax advice. This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances. Any action taken or not taken based on this article is at your own risk. If an article cites or provides a link to third-party sources or websites, Harvard Business Services, Inc. is not responsible for and makes no representations regarding such source’s content or accuracy. Opinions expressed in this article do not necessarily reflect those of Harvard Business Services, Inc.
There are 2 comments left for Stock Amendments in a Delaware CorporationSamir said: Thursday, May 28, 2020
Hello, If we change the number of stocks during the year, which number of shares is used to determine the tax due by the Delaware tax authorities, the initial higher number of shares or the reduced number of shares?HBS Staff replied: Thursday, May 28, 2020
Good question! Delaware will actually prorate the tax to account for the change, so figuring out what you owe can be a bit more complicated. We're happy to help if you need it!Dawei Liu said: Saturday, October 12, 2019
Thank you for this great article! Could you advise what is the associated fee to submit such stock amendment? Also in order to do that, do we also need to request change of Certificate of Incorporation as well? Your response.would be greatly appreciated.HBS Staff replied: Monday, October 14, 2019
We prepare the Certificate of Amendment to change the stock structure, pay the DE fees, have the filing done typically in 3-5 business days, the cost is $450. To proceed please call 800 345 2677 ext 6911 a live person will answer or email us at firstname.lastname@example.org.