Stated value stock is no-par common stock to which the board of directors assigns a small per-share dollar amount by resolution, and that amount becomes the company’s legal capital floor. The figure is almost always nominal, often $0.01 or $1.00 per share. Whatever investors pay above it is recorded separately as Additional Paid-in Capital. The split matters because the legal capital portion is restricted: it can’t be paid out as dividends or used for buybacks in states that still follow the traditional legal capital framework.
Why Boards Set the Number Low
The stated value determines how much of each share sale gets locked into the Common Stock account as permanent legal capital. A company selling shares at $20 with a $1 stated value keeps $1 per share as legal capital; the other $19 flows to Additional Paid-in Capital.
Boards almost always set the stated value far below the expected market price for a practical reason. The higher the legal capital, the less flexibility the company has later. A company with 10 million shares outstanding and a $5 stated value has $50 million locked as legal capital. Drop that stated value to $0.01 and only $100,000 is restricted. The difference is enormous when the board wants to declare a dividend or authorize a repurchase. A high stated value can leave an otherwise healthy company legally unable to return capital to shareholders.
How It Differs From Par Value
Par value is a fixed number written into the corporate charter at formation. Historically it represented the minimum price at which shares could legally be sold. Issuing shares below par created “watered stock” and exposed the original shareholders to personal liability to creditors for the shortfall. That made par value a trap if the market price later dropped.
Stated value sidesteps the problem. Because the board sets it by resolution rather than embedding it in the charter, adjusting it doesn’t require a formal charter amendment. And because companies set it at nominal levels, there’s effectively no risk of selling shares below the stated value, so the classic watered stock liability doesn’t come into play.
This functional advantage drove a broader shift in corporate law. Beginning in 1980, the committee that drafts the Model Business Corporation Act amended it to eliminate par value, stated capital, and treasury share concepts entirely. The MBCA is now the basis for corporate statutes in 32 states and the District of Columbia, and its distribution rules have influenced several additional states.1American Bar Association. Model Business Corporation Act (2016 Revision) Launches In those jurisdictions, par and stated value have largely been replaced by solvency-based tests for distributions. In states that still follow the traditional framework, stated value remains the mechanism companies use to set their capital floor.
How Stated Value Stock Is Recorded
When a company issues stated value stock, the proceeds split across two equity accounts. The Common Stock account holds the legal capital portion, calculated as stated value per share times the number of shares issued. Everything above that goes to Additional Paid-in Capital, sometimes labeled “Paid-in Capital in Excess of Stated Value.” Both appear under a broader Paid-in Capital heading within shareholders’ equity, separate from Retained Earnings.
A Worked Example
Suppose a corporation issues 100,000 shares of common stock with a $0.50 stated value at $15.00 per share. Total cash received is $1,500,000. The entry breaks down as follows:
- Cash (debit): $1,500,000, the full amount received from investors.
- Common Stock (credit): $50,000, calculated as 100,000 shares multiplied by the $0.50 stated value.
- Additional Paid-in Capital (credit): $1,450,000, the premium over stated value.
The debit to Cash equals the sum of the two credits, so the books balance.
When Shares Are Issued for Something Other Than Cash
Shares aren’t always issued for cash. Under the Model Business Corporation Act, the board can authorize shares in exchange for any tangible or intangible benefit to the corporation, including property, services already performed, or contracts for future services. The board determines the fair value of what the company received, and the same accounting split applies: stated value per share goes to Common Stock, and the remainder goes to Additional Paid-in Capital. The board’s determination of adequate consideration is generally conclusive for whether the shares are validly issued and fully paid.
What Legal Capital Actually Restricts
In states that follow the traditional legal capital model, the total stated capital, which is the stated value times all outstanding shares, cannot be distributed to shareholders. Dividends, stock buybacks, and other distributions must come from the surplus above that floor, meaning Additional Paid-in Capital and Retained Earnings. The stated value is the dollar line between locked and available equity.
MBCA states have replaced this framework with solvency-based distribution tests. In those jurisdictions, a company can make distributions as long as it remains able to pay its debts as they come due and its total assets exceed total liabilities. The stated value concept is less binding there, though many companies still assign one for accounting consistency.
Where Stated Value Still Binds
For corporations in MBCA states, stated value is largely an accounting convention. The real distribution limits come from the solvency and cash flow tests, not the legal capital floor. But stated value hasn’t disappeared. Companies incorporated in states that retain traditional legal capital rules, most notably Delaware, still rely on it. And even in MBCA jurisdictions, many corporations assign a stated value because auditors, investors, and SEC filings expect to see the standard equity breakdown between Common Stock and Additional Paid-in Capital.
For federally chartered institutions like stock savings associations, the stated value requirement sits in the charter itself and carries a harder constraint: shares cannot be issued for consideration less than the stated value.2eCFR. 12 CFR 5.22 – Federal Stock Savings Association Charter and Bylaws That rule echoes the old par value floor and shows why the distinction between charter-level and board-level valuation matters for understanding what stated value actually restricts in a given entity.
Tax and SEC Disclosure Notes
A corporation does not recognize taxable gain or loss when it receives money or property in exchange for its own stock, including treasury stock. The rule applies regardless of whether the shares have par value, stated value, or no par value at all.3GovInfo. 26 USC 1032 – Exchange of Stock for Property The entire amount received from investors flows directly into equity accounts without creating a tax obligation for the issuer.4Internal Revenue Service. Revenue Ruling 99-57 When a corporation uses its own shares as compensation for services, the corporation still recognizes no gain on the stock it transfers, but the recipient recognizes ordinary income equal to the fair market value of the shares, and the corporation gets a corresponding compensation deduction.
For public companies, SEC Regulation S-X governs how stated value shows up in filings. For each class of common stock, the balance sheet must show the number of shares issued or outstanding and the dollar amount, along with the title of the issue, the number of shares authorized, and conversion terms if applicable. The equity section requires separate line items for additional paid-in capital, retained earnings (split between appropriated and unappropriated), and accumulated other comprehensive income. Regulation S-X allows the additional paid-in capital line to be combined with the related stock caption, which is why some balance sheets show a single “Common Stock and Additional Paid-in Capital” line rather than two.5eCFR. 17 CFR 210.5-02 – Balance Sheets