Par Value

Par value is the minimum stated value assigned to a share of stock when a corporation is formed. It is a legal designation recorded in the articles of incorporation, not a reflection of market price or company worth. Most states require corporations to declare a par value per share at formation, typically set at a nominal figure such as $0.001 or $0.01.

How par value works

When shares are issued, the par value per share multiplied by the number of shares issued equals the corporation's stated capital, which appears on the balance sheet. Any amount received above par value is recorded separately as additional paid-in capital (also called capital surplus).

For example, if a corporation issues 1,000 shares at $0.01 par value and sells them at $5 each, the stated capital is $10 and the remaining $4,990 is recorded as additional paid-in capital.

Some states allow corporations to issue no-par-value stock. In those cases, the board of directors determines how to allocate proceeds between stated capital and surplus.

Key characteristics

• Fixed at incorporation; does not change with market price
• Typically set very low ($0.001–$0.01 per share)
• Does not reflect market value or intrinsic value
• Affects balance sheet classification of equity
• Can influence state franchise tax calculations
• Applies to corporations only, not LLCs or partnerships

Why par value matters

Par value has limited practical significance for most modern corporations, but it carries real legal and accounting consequences.

• Franchise taxes: Many states use par value to calculate franchise taxes and filing fees, so setting a very low par value can reduce the annual tax burden.
• Balance sheet classification: Par value establishes the stated capital account, which affects what funds can legally be distributed as dividends in some states.
• Legal floor on share issuances: Shares cannot be issued below par value. If they are, the issuance may be legally invalid, and creditors can sue to recover any shortfall.

Common uses

• Delaware formation: Startups commonly authorize shares at $0.0001 par value to minimize Delaware's authorized shares method of franchise tax calculation.
• Stock issuance: When shares are sold above par value, the par value portion goes to stated capital and the remainder to paid-in surplus.
• Preferred stock: Par value often determines dividend calculations for preferred shares. A preferred share with a $100 par value and a 6% dividend rate pays $6 per share annually.

Par value vs. market value

Par value is a legal minimum set at incorporation. Market value is the price at which a share actually trades based on supply, demand, and company performance. A stock may carry a par value of $0.01 and a market value of $200; the two figures have no direct relationship. Market value fluctuates constantly; par value remains fixed unless the corporation formally amends its articles of incorporation.

Related terms

• Direct ownership in business: How shares represent direct ownership stakes in a corporation, which par value helps define at formation.
• Buy-sell provision: Agreements governing share transfers among owners, often referencing share value in relation to stated capital.
• Business entity status: A corporation's standing with the state, which can affect the validity of share issuances tied to par value requirements.

FAQs about par value

What happens if a corporation issues shares below par value?

In most states, issuing shares below par value is legally prohibited and renders the issuance invalid. This is why formation attorneys recommend setting par value as low as possible; it eliminates the risk of a future issuance price falling below the stated minimum.

Does par value apply to both common and preferred stock?

Yes, but it carries more functional weight for preferred stock. Common stock par value is typically nominal with no bearing on dividends. Preferred stock par value is often used directly in dividend calculations; a $100 par value preferred share with a 5% dividend rate pays $5 per share annually.

Is par value the same as face value?

The terms are often used interchangeably, but context matters. For corporate stock, par value is the precise term. Face value is more commonly used for bonds, where it refers to the principal amount repaid at maturity and the basis for coupon payments.