Understanding Authorized Stock and Par Value of a Corporation
When forming a corporation, it is important to understand the concept of authorized stock and par value. These terms are closely related and have an effect on the corporation's capital structure. In this article, we will discuss what authorized stock and par value mean and how they affect your business.
What is Authorized Stock?
Authorized stock is the amount of shares that a company has legally issued. It is usually decided at the time of incorporation or when a new class of stock is created. It has no bearing on how many shares have been sold or are outstanding, only the maximum number that can be distributed by law. Companies may choose to authorize more than what they anticipate needing in order to provide flexibility for future growth.
What is Par Value?
Par value refers to the nominal or face value assigned to each share of stock by the corporation’s articles of incorporation. This assignment creates a minimum price per share that must be paid when transferring ownership of any share in the company’s common or preferred stock, regardless of their market value. For example, if a company assigns a $1 par value to each share, then that would be the minimum price per share that must be paid when purchasing those shares from the company (or from another shareholder). Most states require that companies assign some kind of dollar amount as a par value for each type of stock issued; however, this does not mean that shareholders will actually receive any cash for these shares if bought from another shareholder or other entity outside the corporation itself.
How do Authorized Stock and Par Value Affect my Company?
The primary benefit of assigning both an authorized number of shares and par values is that it gives companies some control over their capital structure—which includes things like equity financing and debt financing—so they can decide how much capital they need in order to finance operations and pursue growth opportunities. It also provides protection against potential dilution since companies can limit how many total shares can be issued in total while still allowing them to issue additional classes or series as needed without having to re-incorporate with higher authorized numbers later on down the road. Finally, by setting specific par values for each class/series issued, companies can better plan out their capital structure (and avoid potential legal issues) since there should never be any surprises when it comes time to transfer ownership between shareholders or other entities outside the company itself.
According to the U.S. Small Business Administration, a typical small corporation will have an authorized share capital of 500,000 shares at a par value of $0.01 per share. This means that the total value of the corporation’s stock is $5,000.
By understanding all aspects related to authorized stock and par value, you can make wise decisions about your business' capital structure now as well as plan ahead for future growth opportunities without worrying about unexpected complications down the road. Whether you're just starting out with your business or already have an established one with multiple classes/series issued over time, having an understanding about authorized stock and par values will help keep your finances organized so you can focus on running your business successfully.
For more information about corporations, or would like to set up your corporation, contact Curington Law, LLC at 312 803-1755 or online.