Why Zero Par Value Stock Affects Franchise Tax
*This article applies ONLY to corporations, not LLCs.*
When forming a Delaware corporation, one significant detail you will need to consider is the number of shares the entity will have authorized, and the corresponding par value of those shares.
The par value of stock that is chosen will affect several structural aspects of the entity, including equity, capital and ownership. Furthermore, the amount of Delaware Franchise Tax your company must pay is based on the number of authorized shares and par value.
What is Par Value?
Par value is the value assigned to the share of stock when it is initally issued by a company. A stock's par value is fixed amount that does not fluctuate with the market value of the stock.
Most startup companies are typically formed with a small number of authorized shares and a low (or zero) par value.
However, some entities want to have a greater number of authorized shares while maintaining a zero par value for the stock. This may not be an ideal option for most companies, and you should take into account how this can potentially affect your company’s annual Franchise Tax each year.
For reference, the state of Delaware has two methods to calculate Franchise Tax: the Authorized Shares Method and the Assumed Par Value Capital Method. The Franchise Tax amounts due range from a minimum of $175 to a maximum of $200,000 per year, plus a $50 Annual Report Fee.
The varying amounts can be contributed to an endless array of options of authorized shares, issued shares, par value and gross assets. Fortunately, the entity only has to pay the lesser amount yielded by the two methods.
How does this pertain to an entity with no par value? Well, a minimum stock company (generally an entity with less than 5,000 authorized shares) with zero par value typically pays Franchise Tax under the Authorized Shares Method. This will usually end up to be the minimum of $175, plus the $50 Annual Report Fee, for a total due of $225.
However, the calculations and resulting amounts due can be different for a maximum stock entity (typically a company with more than 5,000 authorized shares) that has zero par value. This type of business entity must file and pay Franchise Tax under the Authorized Shares Method.
Here are examples of the differences:
- NYC Company has 5,150,000 authorized shares at $.05 par value. By the end of the year, 1,125,000 shares have been issued and there are $56,000 in gross assets. Under the Authorized Shares Method, the Franchise Tax due is $43,940; under the Alternative Method, the Franchise Tax due is $400. The entity will pay the lesser amount of $400 Franchise Tax in this scenario, plus the $50 Annual Report Fee.
- London Company has 2,500,000 authorized shares at 0 par value. Regardless of the number of issued shares or gross assets, this entity will be required to file and pay the annual Franchise Tax under the Authorized Shares Method, which results in a Franchise Tax amount due of $21,415, plus the $50 Annual Report Fee.
Due to example number 2 above, clients typically consider placing a par value on their company’s stock, especially when there is a large number of authorized shares. The par value set for the authorized shares can be a very low rate, anything greater than zero.
This will allow the entity to file annual Franchise Tax under the Assumed Par Value Method and potentially pay a lower amount. In addition, since stock must be sold at higher than par value, it gives the entity more choices when issuing shares to investors.
If you'd like to learn more about the par value of stock and what price it should be set at, be sure to read our blog and reach out to our team with any questions.
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