Shares of Stock – Everything You Need to Know
What are Shares of Stock and how are they used? What is Par Value? What are Authorized Shares? What’s the Difference Between Issued and Authorized Shares? What does Capitalization Mean? What is a Dividend? What are Issued Shares? How Many Shares of Stock are Required? What is no Par Value Stock? Must Stock Have a Par Value? What is the difference between “par” and “no par” stock? What is the relationship between the face value of the shares and the value of the company? Can I change the value of the stock in the future? Find the answers to these questions here.
What are Shares of Stock and how are they used?
Shares of stock are written articles that represent the amount of money invested in the corporation by an individual shareholder. The corporation determines, at the outset of incorporating, how many shares it shall issue and what classes of shares (No Par, Par, Common, Preferred, Participating, etc.) it will issue. In a close corporation, the number of shares are determined and sold to only one or a few investors. In other corporations the shares are sold to many investors or to the public. Each share represents ownership in the company, and it entitles the holder to certain types of rights (voting rights, dividends, etc.).
The different classes of stock determine how dividends will be paid, and how much money will be paid for each share of stock in the corporation. Each share certificate will be marked with the amount of par (the minimum amount of money that must be paid for the share). Share certificates may also be marked as no par, with no minimum amount being paid for the share. This designation must be made at the outset of incorporating and provided for in the Articles of Incorporation.
Additionally, Common stock represents the class of shareholders who shall be paid a dividend last, after the Preferred shareholders are paid first (if any exist). If there are no Preferred shareholders, then the dividend amounts are split equally among the Common shareholders.
What is Par Value?
A business corporation must sell shares of stock in order to capitalize the corporation, that is, provide the corporation with its own capital, separate from the money of its owners. This separation provides part of the support for shielding the shareholders from personal liability for the debts and obligations of the corporation.
Shares of stock sold by the corporation represent proportionate ownership interests held by shareholders in the corporation. “Par value” is a dollar value assigned to shares of stock which is the minimum amount for which each share may be sold. There is no minimum or maximum value that must be assigned. Shares may also have “no par value,” which means that the Board of Directors will assign a value to the stock below which the shares cannot be issued.
There is no minimum number of shares that must be authorized in the articles of incorporation. One or more shares may be authorized. However, the corporation may not sell more shares than it is authorized to issue and it must receive consideration in exchange for its shares.
What are Authorized Shares?
State law specifies that shares of stock in the corporation will be issued under the direction of the board of directors. But, since the corporation is set up to benefit the shareholders, the shareholders set, or limit, the number of shares the directors are “authorized”, or allowed, to issue. Since the directors are not allowed to issue shares without authorization from the shareholders, the number of authorized shares is equal to the number of total shares.
What’s the Difference Between Issued and Authorized Shares?
The board of directors control the issuance of stock. Authorized shares is the total number of shares of stock that the board of directors are “authorized” to issue to shareholders. The board may issue all the shares now, or issue some now, and some later.
Authorized shares become issued shares when “issued” or distributed to a stockholder. Shares that are not issued are usually called authorized but UN-issued shares. UN-issued shares belong to the corporation and are not considered for shareholders’ ownership percentages.
What does Capitalization Mean?
Capitalization is a term that requires a knowledge of accounting to understand, and can have different meanings. With a new corporation, the term generally refers to the amount of money that a corporation has in its “kitty” when operations begin.
Some states have minimum capitalization requirements to insure that corporations have a bare minimum of assets before starting operations. Since shareholders are somewhat insulated from lawsuits against a corporation, these assets provide a means to pay any potential lawsuit winners.
Minimum capitalization requirements also make it a little more difficult to start a corporation, and was probably started to help to keep out the “riff raff ” Today, only a few states have minimum capitalization requirements.
What is a Dividend?
A dividend is a special payment, usually paid at the end of each quarter, and is based on the profits made by the corporation during that quarter. Dividends are usually paid in cash or additional stock to the shareholders. This is a shareholder’s reward for investing in the corporation. It is much the same as interest on a loan except that the dividend is based on the income of the corporation, and may or may not be a regular payment. Also, dividends are not deductible by the corporation while interest payments are. Some owners pay themselves a small salary to minimize FICA withholding, and pay themselves a quarterly dividend instead.
What are Issued Shares?
Issued shares are easily confused with authorized shares. Authorized shares is the maximum number of shares that the board of directors is “authorized”, or allowed to issue. Issued shares, however, is the number of shares actually “issued”, or given out to shareholders. Only issued shares are counted for ownership purposes.
How Many Shares of Stock are Required?
A corporation can’t be a corporation without at least one share of stock. So you must have at least one shareholder, and one share of stock. You can have (authorize) as many shares of stock as you want, however, this may increase your filing fees in some cases.
What is no Par Value Stock?
Since par value more or less means the price to be paid for the shares when purchased from the corporation, no par value stock is stock for which no fixed price is set. This is usually the case in small corporations where the owners issue themselves a number of shares and simply infuse money in the corporation when needed.
Corporations issue no par stock for flexibility. If the corporation’s stock has no par value, then there is no set “price” for the stock. In this case, the directors can raise the “price” of the stock when the corporation becomes more valuable. You see, with no par value stock, the directors decide how much must be paid for the stock each time it is issued to a shareholder.
Must Stock Have a Par Value?
No. Most often in a small business corporation the stock is called “no par value stock” which simply means that there is no set amount of payment required to purchase the stock of the corporation. Each time stock is issued, the directors will decide how much must be received for the shares.
What is the difference between “par” and “no par” stock ?
Par value stock has a stated value on its face. No par value stock has no stated value and its worth depends on what an investor is willing to pay.
What is the relationship between the face value of the shares and the value of the company?
When you go to sell your company you need to have someone value it for you, usually a CPA, or you can value it yourself based on how much you feel that it is worth. This valuation is based on several factors, including the sales or fees earned, fair market value of your assets. The customer list and the goodwill of the company. The person who performs the valuation will inform you of approximate worth of your company. You then would make the decision to either sell the assets of the company or the stock of the company. All companies, even the publicly traded ones have a par value on their shares which is much lower than the current valuation of the stock.
Can I change the value of the stock in the future?
There is no need to do that. All companies, even the publicly traded ones have a par value on their shares which is much lower than the current valuation of the stock. The par value is usually a figure that is set depending on the state and can be used by a state to set the renewal fees or the state taxes.
How to increase the authorized shares of stock?
An increase on the authorized shares of stock has to be formally requested to the state by filing “articles of amendment”. A shareholders’ meeting is ussually required to authorize an increase of the shares since their ownership of the company will be affected due to this change.