Par Value Explained: Stocks, Bonds & Business Formation | Lovie

When forming a corporation, understanding concepts like 'par value' is crucial, even if it seems like a minor detail. Par value, also known as nominal value or face value, is the minimum price per share that a corporation can sell its stock for. It's an arbitrary amount assigned to each share of stock when the company is first incorporated. While it has historical roots and legal implications, especially concerning the initial issuance of shares and capitalization, its practical importance in modern business transactions has diminished for many companies, particularly those in industries where stock is actively traded on public exchanges. For entrepreneurs forming a C-Corp or S-Corp, understanding par value is essential for proper stock issuance and record-keeping. It directly impacts the initial capital recorded on the company's balance sheet and can influence state franchise taxes or filing fees in some jurisdictions. While the concept might seem straightforward, the nuances can be confusing. This guide will break down what par value is, why it matters (or doesn't matter as much as you might think), and how it relates to forming your business entity correctly, ensuring you meet all legal and financial requirements from the outset.

What Exactly is Par Value?

Par value is the nominal or face value assigned to a share of stock by the issuing corporation. It's a figure stated in the company's articles of incorporation. Historically, par value represented the minimum price at which a company's stock could be sold, intended to protect creditors by ensuring a minimum level of capital was maintained. It was also used to calculate the 'stated capital' or 'legal capital' of the corporation – the aggregate par value of all issued shares. For instance, if a c

• Par value is a nominal, arbitrary price per share set by the corporation.
• It historically served as a minimum selling price and contributed to stated capital.
• It is distinct from and unrelated to the stock's market value.
• Amounts received above par value are recorded as additional paid-in capital.

Par Value vs. Market Value: Key Differences

The most significant distinction regarding par value is its complete separation from market value. Market value is the price at which a stock is currently trading on an exchange or can be bought and sold between willing buyers and sellers. This value fluctuates constantly based on company performance, industry trends, economic conditions, investor sentiment, and countless other factors. Par value, on the other hand, is a fixed, nominal amount set when the company is formed and only appears on t

• Market value is determined by supply and demand and fluctuates constantly.
• Par value is a fixed, nominal amount set by the company's charter.
• Par value has no bearing on a stock's trading price or intrinsic worth.
• Public companies often set very low par values to simplify accounting.

The Rise of No-Par Value Stock

Due to the often-confusing nature and diminishing relevance of par value, many states now permit corporations to issue 'no-par value' stock. When a company chooses to issue no-par stock, the articles of incorporation simply state that the stock has no par value. In such cases, the entire amount received from the sale of the stock is typically recorded as stated capital, or it can be divided between stated capital and additional paid-in capital based on a resolution by the board of directors or b

• No-par value stock means shares are issued without a nominal face value.
• The entire proceeds from selling no-par stock can be recorded as capital.
• This simplifies accounting and reduces administrative complexity.
• Many states, including Delaware, permit the issuance of no-par stock.

Par Value's Role in Forming Your Corporation

While par value might not impact day-to-day operations for many businesses, it plays a role during the initial formation of a corporation. The par value of your authorized shares is stated in your company's Articles of Incorporation (or Certificate of Incorporation). This document is filed with the Secretary of State in your chosen state of formation, such as Delaware, Nevada, or Wyoming. For example, if you plan to form a C-Corp in California and decide to authorize 100,000 shares of common st

• Par value is declared in the Articles of Incorporation.
• It can influence initial capital accounting and potentially state filing fees or taxes.
• Choosing between par and no-par value stock is a formation decision.
• A low par value (e.g., $0.01) is common for newly formed corporations.

Legal and Accounting Implications of Par Value

The legal and accounting implications of par value are primarily tied to the concept of 'stated capital' or 'legal capital.' This represents the amount of capital that a corporation is legally required to maintain and cannot distribute to shareholders as dividends or use for stock repurchases, except under specific circumstances and compliance with state law. When stock is issued, the par value of those shares is added to the stated capital account on the company's balance sheet. Any proceeds r

• Par value contributes to the corporation's 'stated capital' or 'legal capital'.
• Stated capital is legally protected and restricts certain distributions to shareholders.
• It ensures a minimum level of equity to protect creditors.
• Accounting treatments for stock issuance and repurchases are influenced by par value.

Choosing Your Corporation's Stock Structure with Lovie

Deciding on the structure of your corporate stock, including the par value or opting for no-par value, is a critical step during the formation process. This decision affects your initial filings, ongoing accounting, and potential future stock issuances. Lovie streamlines this process for you, ensuring clarity and compliance. When you use Lovie to form your C-Corp or S-Corp, you'll be guided through defining your authorized shares. We prompt you to consider the number of shares you wish to autho

• Lovie assists in defining authorized shares and par value during formation.
• Low par value (e.g., $0.01) or no-par value stock is often recommended for startups.
• This choice impacts initial filings and capital accounting.
• Lovie ensures your stock structure complies with state regulations.

Frequently Asked Questions

What is the typical par value for a new corporation?

Most new corporations, especially those planning future growth or seeking investment, opt for a very low par value, such as $0.001 or $0.01 per share. This minimizes accounting complexities and potential state franchise taxes tied to stated capital.

Does par value affect my company's stock price?

No, par value has no direct impact on a stock's market price. Market price is determined by supply and demand, company performance, and investor sentiment, while par value is an arbitrary, fixed amount set during incorporation.

Can I change the par value of my stock later?

Changing the par value of issued stock is a complex legal process, often requiring shareholder approval and an amendment to the Articles of Incorporation. It's generally advisable to set the correct par value (or choose no-par) during the initial formation.

What is the difference between par value and stated capital?

Par value is the nominal value per share. Stated capital (or legal capital) is the total par value of all issued shares, representing the minimum capital a corporation must maintain. Amounts received above par value are recorded as additional paid-in capital.

Should I choose par value or no-par value stock for my LLC?

LLCs do not issue stock and therefore do not have par value. Par value is a concept exclusively for corporations (C-Corps and S-Corps). LLCs have ownership interests represented by 'membership units'.

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