A company can issue different classes of stock out of its authorized shares. The number of authorized shares is set when the company incorporates. The board of directors may raise the number of authorized shares by petitioning to amend the company articles of incorporation or charter. Of these authorized shares, the board issues a class of common stock and assigns a par value. The board may issue other classes of stock with different par values for each issued class.
Par value is only relevant to issued and outstanding shares of stock. There is no par value on authorized but unissued stock. Both common stock and preferred stock have assigned par values. In fact, a share of stock can be a "no par value" stock. The par value, according to accounting expert and author Steven Bragg, "is an archaic term that used to describe the price at which a company's shares were initially offered for sale, so that prospective investors could be assured that the company would not issue shares at a price below the par value." In current practice, par value is normally set at a minimal amount such as $0.001 or 1 cent because states often charge fees based on the par value of the stock, and if a company starts its public life as a penny stock, a low par value keeps the company out of legal difficulties if the stock trades down to the price level of a penny or under.
Since par value is only relevant to issued and outstanding shares, when a company declares a forward stock split, the par value of the stock will also decline in proportion to the stock split. For example: a company with a 1 cent par value stock pre-forward-split of 2-for-1 will double its issued and outstanding shares and the par value will be halved to $0.005 per share. A reverse split of 1-for-2 will halve the number of issued and outstanding shares, but the par value will double from 1 cent to 2 cents per share.
Stock dividends add to the number of issued and outstanding shares, but they are themselves issued by the board and become outstanding shares when delivered, so they don't change the par value of the stock. Stock splits involve only the currently issued and outstanding stock, so the par value changes proportionally. Stock dividends inject newly issued stock of the same or different class to the shares currently outstanding, so the dividend stock is issued with a par value.
No-Par Value Stock
No-par value stock, also called "no-par stock," is issued with the intention of it having no par value. This alleviates any theoretical legal problems that might arise if the stock trades below its par value. It also allows the company to start selling the stock at whatever price the investors will pay. Companies generally sell their $0.001 par value stock to founders and employees so they can have shares of stock without tax consequences that would arise if they were just given the stock. In the case of no-par stock, the value may be assigned according to the price paid for the stock on the nearest day it trades at a price.
- Accounting Coach: Stockholders' Equity
- Auburn University: Reporting and Analyzing Stockholders’ Equity
- Accounting Tools: What is Par Value?
- Accounting Tools: What is No Par Value Stock?
- University of Minnesota. "16.3 Issuing and Accounting for Preferred Stock and Treasury Stock." Accessed June 9, 2020.
Victoria Duff specializes in entrepreneurial subjects, drawing on her experience as an acclaimed start-up facilitator, venture catalyst and investor relations manager. Since 1995 she has written many articles for e-zines and was a regular columnist for "Digital Coast Reporter" and "Developments Magazine." She holds a Bachelor of Arts in public administration from the University of California at Berkeley.