Par value is the minimum issue price for a share of stock. It is always best to use a low par value, even though no par value stock is allowed. The selection of par value will oftentimes be based on how much the founders plan to invest to initially capitalize the corporation. For a pure startup, the shares are most often issued at par value. A par value quite often used is $0.001 per share.
No par value stock is a trap for the unwary: it can likely lead to much higher Delaware franchise taxes because companies with no par value stock will be taxed automatically using the Delaware Authorized Shares Method. If the corporation authorizes 10,000,000 shares, the tax using the Authorized Shares method would be in excess of $50,000—an absurd number.
See Delaware’s Franchise Tax Calculator. Using the Delaware Assumed Par Value Capital Method, the minimum annual Delaware franchise tax will be $350.
If you authorize millions of shares, don’t be shocked when the corporation receives a HUGE franchise tax bill from the State of Delaware, because the state uses the Authorized Shares Method as its default method for calculating the franchise tax due. Make sure you run the calculations using the Delaware Assumed Par Value Capital Method. The corporation pays Delaware franchise tax based on the lower number.
This article originally appeared on Venture Docs, an online platform for automating the creation of important legal documents for startup companies, investors, crowdfunding portals and attorneys.
Image credit: CC by William Cho
