Deciding what type and how many stocks a company will ultimately issue are two
of the hardest decisions a corporation’s owners or board of directors will have
to make. Another is determining the value of those stocks. This is where you
will often hear discussions about par value versus no par value. What do theses
terms mean?
Par value refers to the dollar amount assigned to a share
of stock. It is the minimum amount for which each share of stock may be
sold. Both the minimum and maximum amount you choose to set as the value of
your stock is not governed by law and is solely your decision to make so you can
set it for anything from 1/10th of one cent to $100,000 per share.
However, before you assign that amount there are other things to take into
consideration, which will be discussed in a moment. No par value is as it
sounds – no dollar amount is set, at which a stock may be sold.
You will need to check your
state law
to see if you are required to list a par value amount when issuing stock.
Some states do not require it and allow you to use no par value. If state
guidelines do not require you to list a par value, you may prefer to go the no
par value route and assign a dollar amount later, after your company starts
actually making money and you feel more comfortable in assigning a value to that
stock.
It is also important to keep in mind when deciding whether
to use
par value versus
no par value that the amount of value you assign to your
stock has nothing to do with market value. If you choose to go with par value
it in no way limits, the true cost of your shares. Another possible
consideration to keep in mind comes into play should your corporation declare
bankruptcy. Generally, the par value listed for your stocks is the most that
the shareholder will receive in the event of a bankruptcy. Again, it may be
another motivator for setting that par value low to begin with such as 1/10th
of a penny or $.01. As pointed out before, par value and market value are not
the same so do not think that your company is only worth 1/10th of
one cent! No one is suggesting that it is.
For those thinking of starting a franchise, the difference
between using par value versus no par value also becomes a factor as some states
may exact annual franchise fees based upon the aggregated authorized capital of
the corporation. Therefore, if no par value is assigned to shares, an arbitrary
value will be assigned. For example, if a state set an arbitrary value of $1
per share for each no par value in order to compute the franchise fee, the
franchise fee would be the same for a corporation authorized to issue 10,000
shares at $5 per share as it would for a corporation authorized to issue 50,000
shares at no par value in that state.
Often, states that discourage the use of no par value
shares tend to impose a higher statutory value on those shares in order to
calculate the appropriate fee. Thus, many companies have found it more to their
advantage to set a lower par value and to authorize more shares.
Finally, the distinction between
par and
no par value is a
consideration in accounting. For instance, if you are an owner and think that
some day you may choose to repurchase stocks issued by the company, you will
need to establish a capital surplus account. Many states require that this type
of account be established in order to repurchase stocks. As some sort of value
needs to be assigned, using par value becomes important in this situation.
|
