Starting a business comes with a lot of questions. One question that frequently pops up is about par value. This blog post explains what par value is and why keeping it low is often a good idea for new companies.
What is Par Value?
Par value refers to the initial value assigned to a share of stock in a corporation. It’s essentially a starting point for a share’s price. While some states require a par value, others, like Delaware, allow for shares with no par value.
Why Keep Par Value Low for Startups?
For new companies, we recommend starting with a very low par value, typically $0.0001 per share. Here’s why:
- Lower Cost of Initial Investment: A low par value makes it less expensive for founders to purchase their initial shares. Remember, buying shares requires some form of payment (consideration). A low par value keeps this initial investment minimal.
- Tax Advantages: Early on, you likely don’t want to deal with tax implications related to share value. Granting shares with a high par value could trigger tax burdens for founders.
- Flexibility for Future Growth: A low par value doesn’t restrict your future share price. As your company grows, the market value of your shares can increase without causing tax issues for early shareholders who received shares at a low par value.
Example:
Imagine granting someone 10,000 shares with a par value of $1 each. This person would essentially be receiving $10,000 worth of value, potentially triggering tax obligations. By keeping the par value low (e.g., $0.0001 per share), you avoid this scenario.
Important Considerations
While keeping par value low offers several advantages for startups, there are a few things to keep in mind:
- Certain State Requirements: Some states might have minimum par value requirements. Always check your state’s regulations.
- Shareholder Rights: Par value can sometimes factor into shareholder rights related to distributions or liquidation. Consulting with a lawyer is recommended to ensure you understand these implications.
Seeking Legal Guidance
Par value, along with other aspects of forming a corporation, can be complex. If you’re unsure about setting a par value for your startup, consulting with a business law attorney is crucial. Attorneys at Carbon Law Group can help you understand the legalities of par value and guide you through the incorporation process.
Remember:
Understanding par value and its implications is essential when structuring your startup’s ownership. By carefully considering these factors, you can ensure a smooth and tax-efficient foundation for your growing business.
