Par Value of Stock Explained | Lovie — US Company Formation

When forming a corporation, understanding the intricacies of stock issuance is crucial. Among the key terms to grasp is the 'par value' of stock. While it might seem like a minor detail, par value plays a role in corporate governance, accounting, and legal compliance, particularly when you're filing your Articles of Incorporation with a state like Delaware or California. Par value represents the minimum price at which a share of stock can be sold by the issuing corporation. It's a nominal, often very small, amount printed on the stock certificate. Historically, par value served as a protection for creditors, ensuring that a corporation received at least this minimum amount for each share issued, thereby contributing to the company's stated capital. Today, its significance has evolved, and many states allow for 'no-par value' stock, but understanding par value remains essential for corporate founders. For entrepreneurs establishing a C-corp or S-corp, delving into stock structure is a fundamental step. This includes deciding on the number of authorized shares, classes of stock (common vs. preferred), and importantly, the par value for each share. Lovie assists entrepreneurs in navigating these decisions as part of the comprehensive company formation process, ensuring your corporate structure is sound from the outset.

What Exactly is Par Value of Stock?

Par value, also known as nominal value, is the face value of a share of stock as stated in the corporation's charter or articles of incorporation. It's an arbitrary amount, often set at $0.01, $1.00, or even less. Importantly, par value is not related to the market value or the book value of the stock. The market value is determined by supply and demand in the stock market, while book value is a company's net asset value. Par value is a legalistic concept, primarily serving as a minimum price fo

Par value is the minimum price at which a corporation can issue its stock.
It is an arbitrary, nominal amount, not related to market or book value.
Par value is legally defined in the company's articles of incorporation.
Amounts received above par value are recorded as additional paid-in capital.

Par Value vs. Market Value: Key Differences

It's crucial to distinguish par value from market value, as they represent entirely different concepts in the world of corporate finance. Par value is a fixed, legal denomination assigned by the company during its formation, often set at a very low figure like $0.01 per share. It represents the minimum amount the company can receive for issuing that share. For instance, if you're forming a corporation in Nevada and decide on a par value of $0.01 for your 100,000 authorized shares, the minimum ca

Par value is a fixed, legal amount set by the company.
Market value fluctuates based on supply, demand, and company performance.
Par value is for accounting and legal compliance; market value reflects economic worth.
A significant difference between par and market value is normal.

Understanding No-Par Value Stock

The concept of 'no-par value' stock offers an alternative to traditional par value stock. Many states, including popular incorporation hubs like Delaware and Wyoming, permit corporations to issue shares without assigning any par value. When a company issues no-par stock, it means the shares do not have a stated minimum issuance price printed on them. Instead, the board of directors typically determines the 'stated value' or the price at which the no-par shares can be sold. This flexibility can

No-par value stock has no nominal face value.
The board of directors often determines the issuance price for no-par shares.
It simplifies accounting and avoids legal issues related to issuing below par.
Many states, like Delaware and Wyoming, allow no-par stock.

Legal and Accounting Implications of Par Value

The par value of stock carries significant legal and accounting implications for a corporation. Legally, it establishes a minimum threshold for stock issuance. Issuing stock for less than its par value can be problematic. In many jurisdictions, this is referred to as issuing 'watered stock' or 'discount stock.' This practice can lead to liabilities for the directors who approved the issuance and potentially for the shareholders who received the stock at a discount, especially if creditors are ha

Issuing stock below par value can create legal liabilities for directors and shareholders.
Par value affects how stock issuance proceeds are recorded in accounting (Common Stock vs. APIC).
Changes to par value or authorized shares usually require amending the articles of incorporation.
State filing fees apply for amending corporate documents.

Authorized Shares, Par Value, and State Filing Fees

When you file your formation documents, such as the Articles of Incorporation in states like Florida or Illinois, you must specify the number of authorized shares and their par value (or declare no-par stock). The total potential capital the corporation can raise from issuing all its authorized shares at par value is known as the 'stated capital' or 'par value capital.' This figure can influence certain state franchise taxes or filing fees. For example, in states like Texas, franchise tax calcul

Articles of Incorporation must state authorized shares and par value.
Par value can influence state franchise taxes and annual report fees.
Delaware's franchise tax calculation considers authorized shares and par value.
Careful planning of authorized shares and par value can manage formation and tax costs.

Why Par Value Still Matters for Modern Corporations

Despite the prevalence of no-par value stock and the evolution of corporate finance, par value retains relevance for several reasons. Firstly, it continues to be a legal requirement in some states for certain types of stock or corporate structures, even if it's a nominal amount like $0.001. Adhering to these state-specific mandates, whether you're forming in Ohio or Oregon, is crucial for legal compliance. Failure to do so can invalidate stock issuances or lead to penalties. Secondly, par value

Par value is a legal requirement in some states and for certain stock types.
It's important for understanding historical accounting and financial statements.
Par value serves as a baseline for certain legal rights and calculations.
Correctly setting par value contributes to a sound corporate financial structure.

Frequently Asked Questions

Can par value of stock be zero?: Yes, many states allow corporations to issue stock with a par value of zero or a nominal amount like $0.001. This is often done to minimize potential liabilities associated with issuing stock below par and to reduce franchise taxes based on par value.
What is the difference between par value and stated value?: Par value is a fixed, nominal amount set in the articles of incorporation. Stated value is typically assigned to no-par stock by the board of directors, representing the price at which the stock can be issued. If no par value is set, the board determines the issuance price.
How does par value affect stock dividends?: In some jurisdictions, stock dividends are accounted for based on par value. For example, a stock dividend might be recorded by transferring an amount equal to the par value of the distributed shares from additional paid-in capital to the common stock account.
Do LLCs have par value of stock?: No, LLCs do not issue stock and therefore do not have a par value. Ownership in an LLC is represented by membership interests, not shares of stock. This is a key distinction between LLCs and corporations.
What happens if stock is issued for less than par value?: Issuing stock for less than its par value can create legal liabilities for directors and shareholders, potentially making them responsible for the 'discount.' It can also lead to accounting errors and compliance issues with state regulations.

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