Authorizing Shares for Your Delaware Corporation
Several years ago, our chairman wrote one of his first blog articles on shares of stock entitled "Demystifying Stock." In it, he defines stock and some of the terms commonly associated with stock, such as authorized shares.
Reading his article should give you a better understanding of the definition of stock, but it may still leave you wondering, "How many shares of stock should I be authorizing for my corporation?" Some of you may also wonder, "At what par value do I authorize the stock for the corporation?" When authorizing shares, the corporation must define the quantity, the par value and the classes for the shares.
What are Authorized Shares?
Authorized shares are the total number of shares that a corporation may sell or trade, and are defined at the time of filing the Certificate of Incorporation. Establishing this limit creates the legal framework for dividing ownership in the company, but it does not mean that every authorized share must be distributed immediately. A corporation may authorize shares when it is formed and leave some or all of them available for later use. This information may be changed later by formally amending the Certificate of Incorporation.
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Authorized Shares vs. Issued Shares
Authorized shares represent the total number of shares a Delaware corporation is legally permitted to issue. Issued shares are the portion of those authorized shares that the corporation has actually distributed to shareholders.
For example, a corporation may authorize 10 million shares but initially issue only 6 million to its founders. The remaining 4 million shares stay authorized but unissued, giving the corporation room to issue stock later without immediately amending its Certificate of Incorporation.
How Many Shares Should I Start With?
How many shares should a corporation start with? When authorizing shares for a Delaware corporation, one should consider that the annual Delaware Franchise Taxes will be based on the number of shares; therefore, whenever possible, it is best to keep the number of shares low. A good rule of thumb is to authorize only what the corporation will need. Corporations with 5,000 or fewer authorized shares are considered minimum stock and will pay the minimum Delaware Franchise Tax each year.
If you must exceed 5,000 authorized shares, you will be afforded the opportunity to recalculate the company’s Franchise Tax using a complicated formula called the assumed par value capital method, which will consider the company’s gross assets and the number of issued shares at the end of the year.
As a reminder, the difference between authorized shares vs issued shares is that authorized shares represent the maximum amount of shares that can be in circulation, while issued shares represent the actual amount of shares possessed by shareholders.
Par Value and Share Valuation
If you decide you need more than 5,000 authorized shares for your corporation, the Delaware Franchise Tax calculation is no longer a matter of consequence, and now the focus shifts to the par value assigned to the shares. If the authorized shares of a corporation must exceed 5,000 shares, the next threshold for you to consider is a share valuation of $75,000. Share valuation is simply the number of authorized shares multiplied by the par value.
Par value is only relative to the bottom value of the share, and has no bearing on the market value or stock price of the share. As with the number of authorized shares, it is generally better to keep the par value as low as possible because the initial filing fees will be calculated based on the share valuation. Minimum stock corporations may consider a zero par value, but corporations in excess of 5,000 authorized shares will want to assign a par value to the shares to avoid additional filing fees levied by the Delaware Division of Corporations.
Delaware law allows for a par value as small as $0.000001, thus making it very easy to manipulate your company’s share valuation to remain below the $75,000 threshold. For example, if you decide you need 1,000,000 authorized shares, you can assign a par value of $0.001, which will result in a share valuation (1,000,000 shares x $0.001 par value) of $1,000. Because the share valuation is less than $75,000, the corporation will not experience any additional filing fees at the time of incorporation.
Classes of Stock
A Delaware corporation may authorize one or more classes of stock. Common stock is the standard choice for many corporations, while preferred stock may provide different voting, dividend, conversion, or liquidation rights. The Certificate of Incorporation generally identifies each authorized class, the number of shares assigned to it, and its applicable par value and rights.
When reviewing a corporation’s authorized share structure, it is important to account for every class. For example, a corporation authorized to issue eight million common shares and two million preferred shares has ten million total authorized shares. This combined total may be relevant when calculating Delaware Franchise Tax under the Authorized Shares Method. Under the Assumed Par Value Capital Method, the number of issued shares, par value, and the corporation’s reported gross assets may also affect the calculation.
Issuing Shares After Incorporation
Authorizing shares gives a Delaware corporation permission to issue stock. After incorporation, the board of directors generally approves each stock issuance, including the number and class of shares.
The corporation should document the transaction and any appropriate stock purchase. It should also record the issuance in its stock ledger and provide the shareholder with a stock certificate or confirmation of uncertificated shares. Only authorized but previously unissued shares may be distributed. Issuing more than the authorized amount generally requires the corporation to amend its Certificate of Incorporation first.
How to Increase Authorized Shares
A Delaware corporation cannot issue more shares than its Certificate of Incorporation authorizes. If the available supply is expended, the corporation can increase its authorized shares by amending that document.
The board of directors will usually adopt a resolution that proposes the increase, which is submitted to the stockholders for approval. Once the required approvals are obtained, the corporation files a Certificate of Amendment with the Delaware Division of Corporations and pays the applicable filing fee.
The amendment should state the corporation’s revised number of authorized shares and address any related changes to stock classes or par value. After the filing becomes effective, the newly authorized shares become available for future issuance. Keep in mind that increasing authorized shares may also affect the corporation’s Franchise Tax.
FAQs
How many shares can a Delaware corporation authorize?
Delaware does not impose a maximum number of authorized shares. A corporation can authorize any number of shares as long as the number is stated in its Certificate of Incorporation. However, authorizing more shares may increase the corporation’s filing fees or annual Franchise Tax.
How do authorized shares affect Delaware Franchise Tax?
Under Delaware’s Authorized Shares Method, the Franchise Tax generally increases as the number of authorized shares rises. Corporations may instead qualify to use the Assumed Par Value Capital Method, which considers authorized shares, issued shares and gross assets. Corporations can use whichever method produces the lower tax.
Do authorized shares expire if they are never issued?
No. Authorized shares generally remain available indefinitely unless the corporation amends its Certificate of Incorporation or ceases to exist. Unissued shares do not provide ownership or voting rights, but the corporation may issue them later after receiving the required internal approval.
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There are 5 comments left for Authorizing Shares for Your Delaware Corporation
Lakshmi Subramanian said: Thursday, August 29, 2019Hi, Seek advice on disclosure of share premium received on common stock - can it be clubbed with share capital or is it required to be disclosed separately under 'Share / Securities premium' in the balance sheet
HBS Staff replied: Thursday, August 29, 2019Lakshmi, this is likely a question for your accountant. Unfortunately, we are unable to provide accounting advice.
armen said: Wednesday, February 21, 2018Hi, we formed a Delaware corporation and authorized shares in May 2017, but haven't issued any shares yet. Can you please tell me how much time I have between authorizing shares and issuing them?
HBS Staff replied: Monday, February 26, 2018The issuing of shares is an internal matter in the company. The company is free to issue the shares to the shareholders whenever it chooses.
Jess said: Saturday, December 2, 2017Hello we have incorporated with 5000 shares however the lawyer we employed to write up the share agreements has deemed that 420 shares will be a 10% share in the company. Can anyone explain why they would have left 800 shares
HBS Staff replied: Monday, December 4, 2017No, we do not know why certain shares in your company were not issued or not. Your best bet is to quickly contact an attorney to find out what is going on with your company's shares.
Alex Valdes said: Monday, November 27, 2017Hello, we incorporated our delaware c-corp with Incfile's services. We need to increase our authorized shares to 10,000,000. Incfile has told me that they are unable to make the amendment to service this need. Is this something that your services can help with? Thank you, Alex, CFO
HBS Staff replied: Tuesday, November 28, 2017Yes, we can certainly help to prepare the Cerificatet of Amendment to increase the shares of stock. Please call 800 345 2677, Ext 6911 and a live person will answer right away.
Daniel Jordan said: Saturday, June 10, 2017where to get a copy of public records
HBS Staff replied: Monday, June 12, 2017What type of public records? If you can be more specific or call us at 1-800-345-2677 we can try to help.