What are Shares of Stock and how are they used?
Shares of stock are written articles that represent the amount of money invested in the corporation by an individual shareholder. A corporation sells shares of stock in order to provide the corporation with its own capital (money separate from the money of its owners).
The corporation determines, at the outset of incorporating, how many shares it shall issue and what classes of shares. A corporation cannot exist without at least one share of stock. So, you must have at least one shareholder and one share of stock.
Shares of stock represent proportionate ownership interests held by shareholders in the corporation.
The different classes of stock determine how much money will be paid for each share of stock in the corporation. This designation must be made at the outset of incorporating and provided for in the Articles of Incorporation.
Common stock represents the class of shareholders who shall be paid a dividend last, after the Preferred shareholders (if any exist) are paid first. If there are no Preferred shareholders, then the dividend amounts are split equally among the Common shareholders.
What is Par Value?
“Par value” is the minimum price that a corporation can issue its shares.
The par value is usually a figure that is set depending on the state and can be used by a state to set the renewal fees or the state taxes. Thus, while the concept is somewhat archaic, “par value” still plays an important role and should be thoughtfully considered when forming a startup company.
Par value often does not bear a relationship to the actual value of the shares. In most states, including Delaware, stock is issued with a nominal par value (for example, $0.000001 per share) or no par value at all.
When shares have “no par value,” the board of directors decide how much must be paid for the stock each time it is issued to a shareholder.
Many small businesses choose to issue no par value shares because it gives the owners more flexibility. Initially, the owners issue themselves a number of shares and simply infuse money in the corporation when needed. Later, the directors can raise the “price” of the stock when the corporation becomes more valuable.
If you do set a par value, it may be beneficial to keep that value low. There can be drastic consequences, at least with respect to the Delaware franchise tax, if you set your par value high and your authorized shares high.
What are Authorized Shares?
The board of directors control the issuance of stock. “Authorized shares” is the total number of shares of stock that the board of directors are “authorized” to issue to shareholders.
The board may issue all the shares now, or issue some now, and some later. You can authorize as many shares of stock as you want, however, there are potential fees and tax consequences in doing so.
Authorized shares become “issued shares” when distributed to a stockholder. Shares that are not issued are usually called authorized but UN-issued shares. UN-issued shares belong to the corporation and are not considered for shareholders’ ownership percentages.
There are lots of considerations in determining the right number of shares to authorize and issue when starting a corporation. A lot of thought should also be given to the value (or none value) of your shares. For a consultation on these and other start-up consideration please contact CLC at Ronald.Charlot@charlotlaw.com.