How To Change Your Corporation’s Stock Par Value
There’s a million decisions to make when you start a corporation. Research your potential name. Analyze the market. Appoint a registered agent. Maybe scrape together funds to make a prototype for investors. And on and on and on.
When you finally get to your Articles of Incorporation or other formation document, you’re asked to list the number of shares you want to authorize and their “par value.” You do a quick a Google search to figure out what the heck that means. You skim past a bunch of articles proclaiming that par value no longer has any real meaning or significance in this day and age, blah, blah blah…so you pick a number that doesn’t sound too big or too small (or maybe you forgo par value altogether) and you move on.
And over time, you slowly begin to realize that even if par value is an outdated concept, your corporation’s par value has real—and sometimes significant—effects on your business. Ugh.
What is par value?
Also known as “face value” or “nominal value,” par value is the initial value you assign to your shares. It’s not, however, the sales price. If you have a par value of $0.01 per share, you can still sell those shares for $100 a pop if you want. So why even have par value? What significance does it have?
Traditionally, par value has been important because of the way it figures into your corporation’s legal capital. Your legal capital is the amount of equity that has to stay in the business. Typically, your legal capital is the total par value of your corporation’s common stock (plus the total stated value of any preferred stock).
What does that mean for you? Let’s say your corporation has 5,000 shares of common stock with a par value of $1 per share and no preferred stock. In most cases, your legal capital would be $5,000 (5,000 shares x $1). That means you can’t distribute any of that five grand as dividends; you have to hang on to it to protect the corporation and investors in case things go south.
This traditional system isn’t as straightforward as it once was, however. Some states calculate legal capital differently, and the addition of “no par value” shares threw a bit of a wrench in the system. As a result, par value has lost much of the importance that it once had—but it’s still lurking around and can trip you up if you’re not careful.
How does par value differ state to state?
Rules are all over the place when it comes to par value. In some states, like Alabama, Ohio, Delaware, and New York, you’re not required to have par value at all—shares can be categorized as “no par value” shares. On New York’s standard Certificate of Formation form, the state even lists a “suggested” 200 shares at no par value.
In other states, if you don’t list par value for your shares on your incorporation docs, your filing will be rejected. Sometimes the state will just go ahead and assign you a value if you don’t list one. Rhode Island, for instance, will assign a value of $0.01 per share. In a handful of states, your filing fee to start your corporation will vary depending on the par value you select. In Maryland, if you have over $100,000 in combined par value (or over 5,000 “no par value” shares), you’ll pay more to incorporate. In Missouri, your fee goes up if you have over $30,000 in combined par value.
With all these different rules, par value can get pretty confusing. It’s no wonder corporations often end up with less-than-ideal par value.
What kind of obstacles can the wrong par value create?
There’s two big problems that corporations tend to run into with par value. The first is that they set the par value too high. Why is this a problem? It goes back to legal capital. To make sure the legal capital isn’t diluted, in most states, you’re not legally allowed to sell shares for less than par value (at least not without contingent liability, which is a whole other story…). So, if your par value is $10 a share, you typically can’t sell for any less than that.
This can be tough if you really want to sell but can’t get a good enough price. Also, if you’re a publicly-traded corporation stuck with a high share price, it can be more difficult for investors to buy large groups of shares in lots (which are treated a bit differently by the SEC).
The second problem is that your corporation’s par value (or lack thereof) is racking up extra taxes or fees. Probably the most famous tax that can be affected by a corporation’s par value is Delaware’s Annual Franchise Tax. This somewhat complicated annual franchise tax can be calculated two different ways: the Authorized Shares Method and the Assumed Par Value Capital Method. If your shares don’t have par value, you’re stuck using the first method. This isn’t a big deal if you only have a few shares. For instance, if you have fewer than 5,000 shares, you’ll pay a total of $225.
However, if you have millions of “no par value” shares, you’ll end up paying tens of thousands of dollars in franchise taxes. On the other hand, if you have millions of shares with very low par value, you can use the other calculation method and potentially pay as little as $400 (the minimum tax for the second method).
So how do you change par value?
Laws vary state to state, but generally speaking, any change to par value typically involves an amendment to your corporate charter (your Articles of Incorporation, or whatever the formation document is called in your state).
The easiest change to make is probably switching from “no par value” to par value shares. This is actually fairly common in Delaware—the state’s Division of Corporations even has tax notes on making this change on their website. Apple Inc famously made the switch a few years back. When Apple first incorporated in California, their common stock had no par value. For more favorable treatment in places like Delaware, they later amended their Articles to establish a $0.00001 per share par value for common stock.
If you already have par value and you want to raise or lower it, things are a bit more complicated. Typically, you can’t just make an amendment saying you now have a new par value. Instead, the most common way that corporations change their par value is with a stock split (or reverse stock split).
A stock split is exactly what it sounds like: a division of shares. For instance, imagine your corporation has 25,000 shares of common stock with a par value of $1 each. If you did a 2:1 stock split, you would double the number of shares to 50,000—but the par value of each would drop to $0.50. This kind of change leaves current shareholders relatively unaffected—in the example, your corporation’s total par value before and after is $25,000. Shareholders have twice as many shares at half the value, so they maintain their same proportion of ownership. Corporations can also do a reverse stock split, which would decrease the number of shares and increase par value. Procedures for instituting stock splits vary by state, but they’re commonly enacted with an amendment to the corporate charter.
All this just scratches the surface of par value—as dismissive as many people are about the significance of par value, there are numerous ways, small and large, that par value can affect your business. Heck, if the Dow is an important consideration for your business, note that the Dow weights their index by par value. In any case, whether you’re deciding on your initial par value or making adjustments later on, know that there are plenty of factors to consider. Take your time, and do your research.