Significance of Par Value of a Stock
Common stock and other securities may be issued with or without a stated face value or “par” value. Par value is a nominal value of a security which is determined by an issuer company at a minimum price. Issuing stock with or without par or face value may have several consequences.
If authorized by its charter, a corporation may issue par value stock. However, it must collect at least the stated amount of the par value from the person to whom the stock is issued. The cumulative dollar amount of issued par value stock then must be maintained by the corporation as stated capital and must not be distributed to shareholders in the form of dividends. Further limitations on the use of stated capital may be set out in the state corporation statute.
At one time, the amount of stated capital of the corporation was a measure of the corporation’s credit capacity, and limitations on uses of stated capital still provide a small measure of protection for creditors of the corporation. However, credit of a modern corporation is more likely to depend on factors such as income and cash flow.
The fees and taxes to be paid by a corporation may be affected by the par value of the corporation’s stock. Such fees and taxes may vary in many jurisdictions according to the total par value of all authorized stock. For corporations that have authorized stock with no par value, fees and taxes may be set according to a presumption as to the par value of the stock to avoid the assessment of zero fees and taxes. In states that follow this procedure, the presumptive par value may be set much higher than the corporation might set if it had par value stock. In such instances, corporate charter authorization of par value stock with a minimal par value may reduce fees and taxes imposed on the corporation.
In describing the legal capital structure for corporations, the Model Corporation Act produced by the American Bar Association and adopted in various states does not rely on provisions describing par value or restricting use of stated capital. The Model Act does continue to permit issuance of par value stock, but requirements regarding distribution of corporate assets are not tied to the designation of stock as par value or no par value unless the board of directors chooses that result.
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