When forming a corporation, one important consideration is whether to assign a par value to the shares of stock. Par value is a nominal value per share set by the corporation, representing the minimum price at which shares can be issued. However, the decision of whether to have par value or not can have various implications and should be given careful thought. In this article, we will explore the advantages and disadvantages of having par value for your corporation, and help you make an informed decision.
Advantages of having par value
1. Establishing a minimum value:
Having par value sets a baseline value for your shares, which can provide clarity to investors and the corporation.
2. Ease of accounting:
Par value makes accounting for stock issuances simpler, as it provides a clear value for each share.
3. Legal requirements:
In some jurisdictions, having a par value may be a legal requirement for forming a corporation.
4. Capital maintenance:
Par value helps protect the capital invested in the corporation by setting a minimum price at which shares can be issued.
Disadvantages of having par value
1. Restrictive for fundraising:
Having a par value can restrict the flexibility of setting the price for new issuances, potentially limiting fundraising options.
2. Arbitrary value:
Par value is often more symbolic than reflective of the true value of shares, leading to potential confusion or misinterpretation.
3. Legal implications:
Maintaining a par value may require additional compliance and ongoing legal obligations, which can create administrative burdens for the corporation.
4. Limited shareholder liability protection:
In some jurisdictions, shareholders may be held liable for the difference between the par value and the price paid for the shares if the corporation becomes insolvent.
Should my corporation have par value?
The decision of whether to have par value ultimately depends on your specific situation and objectives for the corporation. If you are seeking capital maintenance, clarity, and simplicity in accounting—having par value may be beneficial. However, if flexibility in pricing, fundraising, and reducing administrative burdens are more important to you, it may be better to opt for a corporation without par value.
Frequently Asked Questions
1. What happens if a share is issued below its par value?
Issuing shares below par value may result in additional requirements or potential liability for the corporation or shareholders, depending on the jurisdiction.
2. Can par value be changed after incorporation?
In many jurisdictions, par value can be changed with the approval of shareholders and in compliance with legal requirements.
3. Is par value the same as market value?
No, par value represents the minimum price of shares set by the corporation, while market value is determined by supply and demand in the open market.
4. Do all states require corporations to have par value?
No, state laws vary, and some jurisdictions do not require corporations to have par value.
5. Can I issue shares above par value?
Yes, in some jurisdictions, shares can be issued above par value, which allows the corporation to capture additional value upon issuance.
6. Does par value affect dividends?
No, par value does not directly influence dividends. Dividends are determined based on corporate earnings and the decision of the board of directors.
7. How is par value determined?
Par value is typically established at the time of incorporation and can be chosen by the founders or shareholders.
8. Can I have different par values for different classes of stock?
Yes, it is possible to assign different par values for different classes of stock, providing flexibility in the capital structure.
9. Does par value impact the ability to go public?
Par value itself does not impact the ability to go public, as meeting the regulatory requirements and market conditions are generally more relevant factors.
10. Is par value the same as authorized capital?
No, authorized capital refers to the maximum number of shares a corporation is permitted to issue, while par value is the minimum price at which shares can be issued.
11. Can par value affect the valuation of my corporation?
While par value may have some influence on the perceived value of the corporation, its impact on overall valuation is typically limited.
12. Are there tax implications associated with par value?
Par value itself does not have direct tax implications. However, the price at which shares are issued may impact tax considerations for both the corporation and shareholders.