Key Takeaways

  • Delaware corporations must consider both the number of authorized shares and the par value when planning to minimize franchise tax liability.
  • Delaware law allows corporations to set a very low par value (e.g., $0.0001) or no par value at all.
  • The par value affects not only shareholder investment obligations but also how franchise taxes are calculated.
  • Using zero par value stock can significantly increase franchise tax under the authorized shares method.
  • Strategic planning around authorized shares and par value can lead to substantial tax savings.
  • Changing the par value or number of authorized shares post-incorporation requires formal corporate action and may trigger additional costs.

Delaware minimum par value comprises a branch of corporate statutes that are usually needed when calculating franchise taxes or offering legal advice. Once set, par value shouldn't need to be addressed again. Like most states, Delaware stock is typically issued with a nominal par value or even no par value.

Delaware's franchise taxes are calculated in two ways. There's the "authorized shares method" that assigns value to each share and the "assumed par value capital method" that accounts for the corporation's assets.

It can be tempting to issue stock with no par value. If the corporation has no value from the beginning, there's no need to assign the par value for stock when creating the corporation. Still, there's more to consider than value alone.

Examples of Delaware Minimum Par Value

Here are two examples pertaining to Delaware minimum par value:

  • For 5,000 authorized shares or less, the tax bill can be expected to be $75.
  • For 15 million authorized shares, the tax bill can be expected to be $112,575.

As long as there's a modest number of authorized shares, the Delaware franchise taxes should be reasonable when using the authorized shares method. Things tend to get tricky when there's no par value. In that case, the authorized shares method may be employed. However, when a corporation adds to their number of authorized shares, it may be faced with a larger franchise tax bill.

Why Par Value Matters for Franchise Taxes

Delaware offers two methods to calculate franchise tax: the authorized shares method and the assumed par value capital method. The method used can result in significant tax differences depending on how shares and par value are structured.

  • Authorized Shares Method: Based solely on the number of authorized shares, regardless of whether the shares have par value. Using this method, 5,000 or fewer shares result in the minimum $175 franchise tax, but larger share counts without a strategic par value setup can lead to taxes exceeding $100,000 annually.
  • Assumed Par Value Capital Method: This method takes into account the corporation’s gross assets and issued shares. A properly calculated low par value can help corporations qualify for this method, which can dramatically reduce franchise taxes.

If a corporation authorizes millions of shares with no par value, it may end up paying the maximum tax amount under the authorized shares method. This is why even a nominal par value like $0.0001 can be a smart choice, as it can open the door to the more favorable assumed par value capital method​.

Pros and Cons of a Par Value System

One of the disadvantages of a par value system occurs when shares are issued at the company's inception. This means the founders will have to pay the corporation the par value per share. However, that's a small price to pay, when the alternative may be a massive franchise tax bill down the road.

One of the best resources is the Delaware Secretary of State's website. There, you'll find a special calculator to help you anticipate your tax bill and gather all the information you need before establishing a corporation.

Limits on the Value of a Shared Stock

Delaware minimum par value will always be the lowest limit for the value of a share of stock. So, if a share's par value is $1, then it can't be issued for less than a dollar to an investor. It must also be paid for in services or funds.

While the minimum par value secures your bottom limit, the board of directors may set the price of the stock at any amount that's deemed to be above par. For example, it would be perfectly legal for the board of directors to set the par value at $0.01 even though they may sell stock to an investor for $5 per share.

Setting Par Value

When beginning your corporation, if it's a small startup an incorporator may suggest you set a low to no par value. This way, the initial shareholders won't need to make large investments in order to own their own company at its inception.

In the event there are no par shares, it's possible they'll be issued to shareholders without an exchange of goods, services, or funds. Just like shares with par value, having no par value won't restrict you from selling your shares to investors at the price set by the board of directors.

Rather, a corporation may want to assign a par value so an investment — be it services or funds — will be required to own a share in the company. This can actually set the company up to produce investment revenue for growth opportunities or recoup startup costs.

How to Change Par Value or Share Structure

If your corporation needs to change the par value or the number of authorized shares after incorporation, it must amend its Certificate of Incorporation. This requires:

  • Approval from the board of directors
  • Approval from the shareholders (typically a majority vote)
  • Filing a Certificate of Amendment with the Delaware Secretary of State
  • Paying an amendment filing fee

It’s important to note that changing to or from zero par value may impact franchise tax liability, and corporations should calculate both short- and long-term consequences before proceeding.

Limits on the Number of Shared Stock

Like other states, Delaware has set a limitation on the number of shares that can be offered at no par. It will also charge an additional fee based on the number of shares authorized at no par. Specifically, Delaware's Division of Corporations will allow up to 1,500 shares of no par stock before you're hit with an additional filing fee. In the end, franchise taxes for high amounts of no par stock may prove to be very expensive. You'll mostly start to see this when you're entering into an excess of 5,000 authorized shares.

Best Practices for Setting Delaware Minimum Par Value

To strategically structure your corporation and minimize future tax burdens, consider the following best practices:

  1. Set a Low Par Value: A common choice is $0.0001. This nominal amount satisfies legal requirements while keeping financial obligations minimal.
  2. Avoid No Par Value Unless Necessary: While it offers flexibility, no par value can significantly increase franchise tax liabilities when using the authorized shares method.
  3. Keep Authorized Shares Reasonable: Unless your fundraising plans require a large share count, stick to a modest number to keep tax bills low.
  4. Use Delaware’s Franchise Tax Calculator: The official Delaware franchise tax calculator helps you model different share/par value structures and see how they affect your tax bill​.
  5. Review Annually: As your corporation grows, revisit your share structure to ensure it's still tax-efficient.

For tailored advice, consulting a legal professional is highly recommended.

Frequently Asked Questions

  1. What is Delaware minimum par value?
    It’s the lowest legal value that a share of stock can be issued for, commonly set at $0.0001 per share in Delaware.
  2. Is it better to issue stock with par value or no par value?
    Issuing low par value stock (like $0.0001) is generally better for reducing franchise tax liability compared to issuing no par value stock.
  3. How does par value affect Delaware franchise taxes?
    The par value influences which tax method is applied. Corporations may save significantly using the assumed par value capital method if par value is set strategically.
  4. Can I change the par value of my corporation's stock later?
    Yes, but it requires filing a Certificate of Amendment with the Delaware Secretary of State and approval from shareholders and the board.
  5. Where can I calculate my Delaware franchise tax?
    You can use the Delaware franchise tax calculator to estimate taxes based on different par value and share structures.

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