The par value of a stock is a nominal dollar amount, set in a corporation’s certificate of incorporation, that fixes the minimum legal capital backing each share. Most public companies set it at a fraction of a penny, so it has almost nothing to do with what the stock trades for. It still matters because it determines how much of a company’s equity is locked up as capital versus available as surplus, affects whether dividends can be paid, drives part of the Delaware franchise tax calculation, and creates the accounting entries that appear in the stockholders’ equity section of every balance sheet.
Where Par Value Comes From and Why It Persists
Par value was designed to protect creditors. If a corporation committed to a minimum value per share, it would always hold at least that much capital in reserve, a cushion that couldn’t be drained by dividends or buybacks. Over time the protection thinned. Companies learned to set par at trivially low amounts, and many states eliminated the concept entirely by adopting the Model Business Corporation Act, which dropped par value, stated capital, and treasury share requirements.
The concept still governs corporations formed in states that kept it, most importantly Delaware, where a large share of major U.S. companies are incorporated. In those states, the par value printed in the charter separates “capital” from “surplus” on the books, and that line controls what the company can legally distribute.
When founders form a Delaware corporation, the certificate of incorporation must state the total number of authorized shares and either the par value of each share or a declaration that the shares have no par value.1Justia Law. Delaware Code Title 8 – 102, Contents of Certificate of Incorporation If more than one class of stock will be issued, par value must be specified separately for each class. Par value multiplied by the number of issued shares equals the company’s legal capital: the minimum equity that has to stay in the business. Setting par at $0.01 on 10 million issued shares locks in $100,000. Setting it at $0.0001 keeps that number tiny and preserves flexibility.
Par Value Versus Market Value
Market value is what investors pay for a share on an exchange, and it moves constantly with earnings, economic conditions, and sentiment. Par value sits fixed in the charter and changes only if the company formally amends its certificate.
A stock with a $0.01 par value can easily trade at $150. The gap exists because par is an accounting placeholder, not a valuation. Investors pay it almost no attention when buying or selling. Earnings growth, competitive position, and future cash flows drive the trading price; the par figure does not.
How Par Value Restricts Dividends
Under Delaware law, the board can pay dividends only out of the corporation’s “surplus,” meaning the amount by which net assets exceed total capital.2Justia Law. Delaware Code Title 8 – 154, Determination of Amount of Capital If there’s no surplus, dividends can come from net profits for the current or preceding fiscal year, but that fallback disappears when capital has been impaired below the level needed to cover the liquidation preference of preferred stock.3Justia Law. Delaware Code Title 8 – 170, Dividends; Payment; Wasting Asset Corporations
Capital, at minimum, equals the aggregate par value of all issued shares with par.2Justia Law. Delaware Code Title 8 – 154, Determination of Amount of Capital A company that sets par high locks up more capital and shrinks the surplus available for dividends. A company that sets it at $0.0001 keeps virtually all of its equity classified as surplus, preserving maximum flexibility to return cash to shareholders. That is the single biggest reason modern corporations pick such tiny par values.
Selling Shares Below Par Value
The traditional rule is that a corporation cannot issue shares for less than their stated par value. Delaware enforces this through a minimum consideration requirement tied to share issuance.4Justia Law. Delaware Code Title 8 – 152, Issuance of Stock; Lawful Consideration; Fully Paid Stock The rule is not universal, though. No federal law expressly prohibits selling stock below par, and some states permit it.5Office of the Comptroller of the Currency. Interpretive Letter 1112 – Issuance of Common Stock Below Par Value The prohibition depends on the state of incorporation.
In states that do restrict below-par issuance, shares sold for less than par are called “watered stock.” If the company later can’t pay its debts, directors or shareholders who received watered stock may be personally liable for the shortfall between the issue price and par, and creditors can pursue that gap directly. Setting par as low as possible makes this risk close to impossible to trigger. When par is a fraction of a penny, any real issuance clears it.
How Par Value Appears on the Balance Sheet
Par value shows up in the stockholders’ equity section. The total par value of all issued shares is credited to the Common Stock account. Anything investors paid above that amount goes into Additional Paid-In Capital.
Say a company issues 1,000 shares with a $0.01 par value at $25 per share. Common Stock gets credited $10 (1,000 × $0.01). The remaining $24,990 goes to Additional Paid-In Capital. Cash rises by the full $25,000. The split between the two equity accounts shows how much of the company’s equity is legally locked as capital and how much is surplus.
No-Par Stock
Many corporations issue shares with no par value at all. Under the Model Business Corporation Act, adopted in some form by a majority of states, par value is not required. Companies incorporated in those states face no watered-stock liability and no statutory floor on issuance price.
The accounting is different too. When no-par shares are issued, the entire purchase price is typically credited to Common Stock rather than split with Additional Paid-In Capital. A company issuing 500,000 no-par shares for $1 million puts the full $1 million into Common Stock. Some states let the board designate a “stated value” for no-par shares and allocate anything above that to surplus, but the board usually has to act within a specified window after issuance or the whole amount remains as capital.
For companies incorporated where par value is still recognized, switching to no-par requires amending the certificate of incorporation, which generally means a board resolution followed by a shareholder vote.
Par Value and Preferred Stock
Par value carries more weight for preferred stock than for common. Preferred dividends are frequently stated as a percentage of par. A “6% preferred” with a $100 par value pays $6 per share annually. Change the par, and the dividend amount changes with it.
Liquidation preference is the other place par value matters for preferred shares. When a company dissolves, preferred shareholders typically have a claim equal to the par or stated value of their shares before common shareholders receive anything. When the liquidation preference exceeds par by a meaningful amount, SEC rules require public companies to disclose that difference on the face of the balance sheet.
Par Value and Delaware Franchise Tax
Delaware offers two methods for calculating its annual franchise tax, and par value drives one of them. The Authorized Shares Method ignores par value entirely and bases the tax on how many shares the company is authorized to issue, starting at $175 for 5,000 shares or fewer.6Delaware Division of Corporations. How to Calculate Franchise Taxes Companies with no-par stock always use this method.
The Assumed Par Value Capital Method calculates tax at $400 per million dollars (or fraction thereof) of “assumed par value capital,” a figure built from total gross assets divided by total issued shares to get an “assumed par” per share, then applied across the authorized share count depending on whether each class’s actual par is above or below that assumed par.6Delaware Division of Corporations. How to Calculate Franchise Taxes The minimum under this method is $400, and the maximum for any corporation under either method is $200,000.
A company that authorizes billions of shares with even a modest par value can face very different tax bills under the two methods. Delaware requires corporations to report both calculations and pay the lower amount, so par value and authorized share count set together with the tax in mind can keep the bill near the minimum.
Changing Par Value After Incorporation
A corporation can change its par value by amending the certificate of incorporation. In Delaware, the board adopts a resolution proposing the amendment, then calls a shareholder meeting to vote on it. A majority of outstanding shares entitled to vote must approve the change. If the amendment would alter the par value of a particular class, holders of that class vote as a separate group, even if the certificate does not otherwise give them voting rights on amendments.7Justia Law. Delaware Code Title 8 – 242, Amendment of Certificate of Incorporation After Receipt of Payment for Stock
The same amendment can convert par-value shares to no-par shares or the reverse, and can change the number of authorized shares at the same time. Corporations qualified to do business in other states will need to update their foreign qualification filings there as well.
Bonds Use the Same Term for Something Else
“Par value” for a bond means something different. A bond’s par value (usually $1,000) is the amount the issuer promises to repay at maturity and the base for calculating coupon payments. A 5% coupon on a $1,000 par bond pays $50 per year. Bond prices fluctuate but tend to stay near par because the repayment amount is fixed. A stock’s par value has no connection to what the company will ever pay back, and market prices can diverge from it by orders of magnitude. The shared name is the only thing the two concepts have in common.