How to Set a Share Par Value?
The most common question entrepreneurs ask when setting up their company and signing their corporate documents is: how is the share par value determined? Their main concern is about the small value legal consultants or company formation service providers usually use when drafting the company’s relevant corporate documents. This is why, in this article, we are going to tackle the following questions: What precisely a share par value is? Why use a low value to determine it? Are we obliged to set it?
Par Value is used to determine a share’s original value; it’s also called face value or nominal value. Hence, it refers to the share’s initial value when it was first issued; it is usually mentioned in a company’s Bylaws or Articles of Association. It sets out the lowest limit of the share stock value in a company, typically one cent per share. For example, a company’s share capital would be 1000 USD, where 100 shares are issued for a 0.1 USD per share. What’s important to know here is that the par value and the market value are two different things; the first has no impact on the second. This means that shares can always be sold at a different price determined by founders and accepted by investors, whatever the market will bear, no matter what the share par value is. However, a share may not be bought, sold, or traded for less than the selected par value. Therefore, if we take the previous example, founders cannot issue shares to an investor for less than 0.1 USD, whether paid by funds or services.
By now, you are probably wondering what the importance of determining the par value, considering that it has nothing to do with the shares’ market price. Well, here are the two main reasons to bear in mind when it comes to determining a par value:
In some countries, it is mandatory to set a share par value. Since they are obliged to do so, they tend to choose the smallest possible value, often less than one dollar, nearly for the following purposes: One, the relationship between a company and its shareholders is Two, if the share’s market price becomes lower than the par value, the company may be financially liable to its shareholders for the difference. Therefore, to avoid such situations and since they are required by the law to set a par value, company founders and shareholders choose to set a minimum par value.
Nevertheless, setting a par value is not required in other countries. In this case, companies may choose to issue a no-par value share to their shareholders or founders without exchanging funds, goods, or services. And this will not restrict any company from selling its shares to investors at any determined price by founders and investors. Even though this is legal, yet it is not recommended. Determining a par value will help any startup generate investment revenue from investors; this is crucial for its growth or to retrieve its formation costs. Think about it, which ground investors will provide a company with an amount of money if its shares structure is not clearly defined in terms of the total share capital, the total number of shares, and the value per share? Not to mention that some states, like Delaware, for instance, allows up to 1,500 shares of no-par stock only; otherwise, companies will begin to face additional filing fees. Also, franchise cost taxes for large numbers of no-par value shares are prohibitive.
Setting up a company can be challenging; it is not only about creating a legal identity for your business. You need to follow some legal and financial requirements to structure your company strongly. Lexyom, here can do a lot!
