Understanding Your Company's Stock

Who needs stock?
According to Delaware law, every corporation must have one class of Common Stock. Limited Liability Companies (LLCs) do not have stock requirements. Non-Stock Corporations cannot have any stock, and S Corporations cannot have any Preferred Stock.

Why do I need stock?
You need stock to evidence ownership in your corporation. You don't need stock to evidence ownership in your LLC.

What are common and preferred stock?
Common Stock is prescribed by law: each share of stock carries one vote, and common shareholders are entitled to their pro-rata share of dividends (if a dividend is declared).

One popular method of preserving voting control for the insiders when raising investment capital is the use of Preferred Stock, in addition to Common Stock. Under Delaware Law, preferred stock has no set prescription or formula. Its terms are open and limited only by what the dealmakers come up with. It can be structured to give the investors preferential financial assurances without giving them voting rights.

Preferred stockholders may be preferred as to dividends, liquidation rights (if the company should go under), and other considerations. It may be voting stock or non-voting stock. The company can have the right to buy out preferred stockholders at a given price, or at a given date in the future for a formula price. This is one of the great advantages of Delaware Corporation Law - it's flexible. Corporate lawyers refer to this type of stock as "Blank Check Preferred".

When you purchase Preferred Stock certificates through Harvard Business Services, Inc., you will receive 10 additional stock certificates marked "PREFERRED", a booklet describing the use of Preferred Stock in more detail, and all the necessary additions to your Certificate of Incorporation and Corporate Records to authorize you to sell and issue them. If you purchase these preferred shares at the time of formation, we only charge $150.00. If you decide to purchase them later, we charge $350.00.

For more information on Preferred Stock, please, see the blog post on our the HBS Blog.

When do I issue stock?
This is entirely up to you. Obviously, you will want to issue common stock to yourself early in the organization process to help prove your ownership interest in the company. If you have other initial investors, they will expect the same. Going forward, as you attract more investors, you can then start issuing more common stock as your circumstances require. This may also be the best time to consider issuing preferred stock to you and/or your investors in order to preserve your rights and special powers.

Where do I get stock certificates and other supplies for my company?
In HBS's Standard and Express Service Packages, you will receive a Company Kit that includes 20 Stock Certificates for your particular company. If you need more stock certificates please call or email us.

How much stock do I need?

Since your annual Delaware franchise taxes are based on your number of shares and their par value, it is best to keep both of these as low as you can.

Initially, many attorneys recommend that you begin with 1,500 shares of "no-par" stock. This constitutes the highest number of shares and the lowest par value that keeps you within the guidelines for the minimum annual taxes and filing fees of $125 per year. Later, you can increase the number of shares if you need more.

If you need more than 1,500 shares of stock initially, it becomes expensive to issue "no-par" stock. By placing a small par value on your stock you can save a significant tax bite.

With par-value stock, in order to qualify for the lowest initial taxes (include in our service fee), you must have no more than $75,000 in total equity valuation.

The formula works like this:

Number of shares (multiplied by) Par Value = $75,000 (or less)

Accordingly, all of the share configurations below are allowed within the minimum initial tax:
15,000 shares @ $5.00 each (par value) = $75,000
150,000 shares @ $0.50 each (par value) = $75,000
1,500,000 shares @ $0.05 each (par value) = $75,000
15,000,000 shares @ $0.005 each (par value) = $75,000

Include all classes of stock, common and preferred, when figuring the above formula.

Par value has no relation to "market value" or "stock price", except that you cannot sell stock for less than par. Therefore, if you plan on issuing stock to yourself for starting the company, you may want to consider keeping your par value low. This does not limit you with respect to stock price when you sell shares of stock to investors. Stock price is a matter of "what the market will bear" and it is to be expected that a company's stock price will fluctuate.

If you decide to place a par value on your stock (under $100 per share), your annual franchise tax can be figured by a complicated formula based on your company's gross assets at the end of the year and the number of issued shares (not authorized shares). When you have the required information, we will assist you in figuring out your taxes each year without charge.