When forming a Delaware corporation, one significant detail you will need to consider is the number of shares the entity will have authorized, and the corresponding par value of those shares.
The values that are chosen will affect several structural aspects of the entity, including equity, capital and ownership. Furthermore, the amount of Delaware Franchise Tax your company must pay is based on the number of authorized shares and par value.
Most startup companies are typically formed with a small number of authorized shares and a low (or zero) par value.
However, some entities want to have a greater number of authorized shares while maintaining a zero par value for the stock. This may not be an ideal option for most companies, and you should take into account how this can potentially affect your company’s annual Franchise Tax each year.
For reference, the state of Delaware has two methods to calculate Franchise Tax: the Authorized Shares Method and the Assumed Par Value Capital Method. The Franchise Tax amounts due range from a minimum of $175 to a maximum of $200,000 per year, plus a $50 Annual Report Fee.
The varying amounts can be contributed to an endless array of options of authorized shares, issued shares, par value and gross assets. Fortunately, the entity only has to pay the lesser amount yielded by the two methods.
How does this pertain to an entity with no par value? Well, a minimum stock company (generally an entity with less than 5,000 authorized shares) with zero par value typically pays Franchise Tax under the Authorized Shares Method. This will usually end up to be the minimum of $175, plus the $50 Annual Report Fee, for a total due of $225.
However, the calculations and resulting amounts due can be different for a maximum stock entity (typically a company with more than 5,000 authorized shares) that has zero par value. This type of business entity must file and pay Franchise Tax under the Authorized Shares Method.
Here are examples of the differences:
Due to example number 2 above, clients typically consider placing a par value on their company’s stock, especially when there is a large number of authorized shares. The par value set for the authorized shares can be a very low rate, anything greater than zero.
This will allow the entity to file annual Franchise Tax under the Authorized Shares Method and potentially pay a lower amount. In addition, since stock must be sold at higher than par value, it gives the entity more choices when issuing shares to investors.
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.