“Par Value” – What it Means and How it Can Affect Your Startup

Par value. It’s a concept that many entrepreneurs see in their corporate documents, but few truly understand. What is par value? What does it mean when you see it in your documents? Do you even need it? These are questions we commonly hear from befuddled entrepreneurs.

What is Par Value?

Because boards of directors are charged with fiduciary duties to the corporation’s stockholders, the corporate statutes prohibit corporations from issuing stock without the corporation receiving value in return. The value that must be received in return could be cash, property, services, or any combination of the three.  When a corporation has established a par value for its stock, the par value is the lowest price per share at which the corporation may sell its stock. Par value should not be confused with other common stock values – such as “book value” and “fair market value.” Thus, if a corporation’s common stock has a par value of $0.01 per share, the corporation would be in violation of its charter if it sold any of its common stock for less than $0.01 per share. For this reason, when a corporation has set a par value for any of its stock, the par value is typically set at a very nominal amount (e.g., $0.0001 per share).

Using Par Value to Calculate Franchise Taxes

One of the most common ways par value is actually utilized is with respect to calculating the Delaware Annual Franchise Tax (this of course only applies to corporations formed in Delaware). Each year, corporations formed in Delaware but which have their principal place of business outside of Delaware are subject to an annual franchise tax levied by the Delaware Secretary of State. The default method for calculating this tax (called the “Authorized Shares Method”) is determined by multiplying a dollar value by the number of shares the corporation has authorized.

For example, a corporation with 10,000,000 shares authorized, the method of tax calculation is $150 for the first 10,000 shares authorized, plus $75 for every additional 10,000 shares authorized, resulting in a Delaware Annual Franchise Tax bill of $75,075.

This typically causes startup founders to become awash with panic. Thankfully, there is an alternate method for calculating the Delaware Annual Franchise Tax that typically results in a much, much lower tax bill for technology startups. The alternate method, called the “Assumed Par Value Capital Method” involves dividing the value of the corporation’s gross assets (meaning tangible assets like machinery, real property, and durable goods – but usually not intangible assets like intellectual property) by the total number of shares outstanding. This produces a price per share called the “Assumed Par Value.” The next step of the equation requires a calculation using the lower of the company’s actual par value or the Assumed Par Value. If your corporation has a very low par value for its shares (e.g., $0.0001 per share) and tangible assets of nominal value, chances are your corporation’s Delaware Annual Franchise Tax bill will be very close to the minimum ($350 as of this writing).

Is My Corporation Required to Have Par Value?

Corporate statutes in Washington and Delaware do not require corporations to establish par values for their shares. That said, because having a par value can be useful for lowering your corporation’s Delaware Annual Franchise Tax, we recommend that our clients who are formed in Delaware set a very low par value (e.g., $0.0001 per share) on each class of stock authorized. Corporations formed in Washington are permitted to have a par value on their shares, but par value serves no function in Washington and generally provides no benefit to privately-held Washington corporations. For this reason, we typically advise our clients who are Washington corporations not to set a par value on any of their shares.