Planning on forming a Delaware corporation? If so, you’ll have to decide how many shares your corporation should authorize.
Here’s a few reasons why this matters:
- Delaware requires you to state the number of authorized shares in your Certificate of Incorporation.
- The number of authorized shares impacts the corporation financially.
- The number of authorized shares impacts the corporation operationally.
- You can increase or decrease the number of authorized shares after formation, but that can be a time consuming and expensive process so it’s a best practice to figure it out before filing your Certificate of Incorporation.
- The consequences of doing it wrong can be devastating. If you aren’t sure, it’s wise to get the advice of a lawyer who’s familiar with what your corporation needs.
What are authorized shares?
So what exactly are “authorized shares”, and why are they so important? Here’s some things you should know:
- Authorized shares are the maximum number of shares a corporation can own, sell, or trade.
- The number of authorized shares is always stated in the most current version of the Certificate of Incorporation.
- Don’t confuse authorized shares with issued shares – which are the shares that have already been sold or distributed to shareholders.
How many shares should a new corporation authorize?
There’s no “one size fits all” answer to the question of how many shares to authorize. Here are some questions you should ask yourself:
- How concerned are you with keeping your franchise taxes low?
- Do you think you’ll be selling shares to a lot of outside investors to fund the corporation’s operations or to expand someday?
- Will you have multiple funding rounds?
- Do you want to issue stock or stock options as compensation or bonuses?
Authorized shares affect annual franchise taxes
Delaware corporations have to pay an annual franchise tax. There are two methods of calculating the tax. The corporation can use the method that results in the lower tax.
- “Authorized shares method.” Under this method the franchise tax is based solely on the number of authorized shares. The more authorized shares, the higher the franchise tax. For example:
- A corporation with 5,000 authorized shares or less pays the minimum tax of $175.
- A corporation with 10,005 authorized shares pays $335.
- A corporation with 100,000 authorized shares pays $1,015.
- A corporation with 1,000,000 authorized shares pays $8,665.
- A corporation with 10,000,000 authorized shares pays $85,165.
- “Assumed par value capital method”. This is a much more complex calculation that involves not only the number of authorized shares but the corporation’s gross assets and issued shares. (Which is why I can’t tell you what the tax will be because I don’t know what your corporation’s gross assets and issued shares will be).
