A common question that we are constantly asked by Israelis and other international clients interested in forming a corporation in the United States is what value we should use for the corporation’s par value. In addition, during the course of performing diligence on a target U.S. corporation, there are always references to the par value of the corporation in both the organizing documents and the stock certificates, thus we are inevitably asked by our clients whether there is any significance behind those numbers.
Before addressing this question, let’s take a step back and examine what the par value of a corporation even means. Generally, par value is the minimum price per share that shares can be issued in order to be considered fully paid. Thus, a share of stock cannot be issued by a corporation for any amount less than the par value. (Once properly issued and paid for, a third-party holder could sell a share for less than par value, because the corporation will have received the required initial value.) It therefore comes as no surprise that par values of $.01 or $.001 are commonly seen, as this means that the corporation’s founders only have to invest a small dollar value in exchange for shares of ownership of the corporation. As explained below, a low par value can result in lower state franchise tax fees. A corporation also may issue shares with no par value, although corporations often forego this option, as listing a par value can be a mechanism used to generate investment revenue and/or to recoup startup costs. As described below, a no-par-value share also may be subject to high franchise fees based on an artificially high assigned value.
Annual Franchise Tax
Perhaps the most important feature of setting a par value is the impact it has on annual franchise taxes for a Delaware corporation, which, due to the advanced and flexible Delaware General Corporation Law and highly sophisticated court system, is the state of incorporation for many companies that we incorporate and perform diligence on. As explained on the State of Delaware’s website), there are two methods used for assessing the annual franchise tax for Delaware corporations – the “authorized shares” method and the “assumed par” method – and the State accepts the method resulting in the lesser tax. The website also contains a link to a helpful franchise tax calculator that assists in calculating these numbers.
(1) For corporations having no par value stock, the “authorized shares” method will always result in the lesser tax. Note that in a corporation with a large number of shares issued at no par value, the annual franchise tax bill will get very hefty! The “authorized shares” method calculates annual franchise tax as follows:
- 5,000 shares or less (minimum tax) – $175
- 5,001 – 10,000 shares – $250
- each additional 10,000 shares or portion thereof – add $75
- maximum annual tax – $180,000
(2) For corporations with par value, the more complicated “assumed par value” method can be used that also assesses all issued shares (including treasury shares) and total gross assets. Note that the minimum tax for the assumed par value capital method of calculation is $350. The following example from the Delaware website explains how this calculation is used:
The example cited below is for a corporation having 1,000,000 shares of stock with a par value of $1 and 250,000 shares of stock with a par value of $5, gross assets of $1,000,000 and issued shares totaling 485,000.
- Divide your total gross assets by your total issued shares carrying to 6 decimal places. The result is your “assumed par.”
Example: $1,000,000 assets, 485,000 issued shares = $2.061856 assumed par.
- Multiply the assumed par by the number of authorized shares having a par value of less than the assumed par.
Example: $2.061856 assumed par times 1,000,000 shares = $2,061,856.
- Multiply the number of authorized shares with a par value greater than the assumed par by their respective par value.
Example: 250,000 shares times $5 par value = $1,250,000
- Add the results of #2 and #3 above. The result is your assumed par value capital.
Example: $2,061,856 plus $1,250,000 = $3,311 956 assumed par value capital
- Figure your tax by dividing the assumed par value capital, rounded up to the next million if it is over $1,000,000, by 1,000,000 and then multiply by $350.
Example: 4 x $350= $1,400
As described above, the amount of the par value can have a significant effect on the annual franchise tax that a corporation has to pay.