How Many Shares Should Be Authorized When Forming a Delaware Corporation

When forming a Delaware corporation, the number of authorized shares can significantly impact your company's future flexibility and cost considerations. While there are no strict rules, understanding the implications of different choices is crucial.

Common Practice: Starting with 1000 Shares

It is common for small businesses and startups to authorize a minimum of 1000 shares. This number often provides sufficient flexibility for initial operations and future expansions without incurring high costs. However, as your corporation grows, you may need to re-evaluate your authorized share count.

Future Needs and Flexibility

Future needs should be a key consideration when determining how many shares to authorize. If you anticipate needing additional shares for fundraising, employee stock options, or other purposes, it is advisable to authorize a larger number. For instance, authorizing 10000 or 100000 shares can accommodate future growth and capital raising without the need for frequent changes to your articles of incorporation.

Par Value and Cost Considerations

Par value is the minimum price at which shares can be issued. Common par values for shares are 0.01 or 0.001 per share. When forming a Delaware corporation with a large number of shares, it is essential to specify a low par value, such as 0.0001 per share, to avoid excessive annual fees. This is especially important if you anticipate issuing a large number of shares or if you plan to use shares for employee stock options.

Annual Franchise Tax and Balance with Flexibility

Delaware does charge an annual franchise tax based on the number of authorized shares. Balancing the number of authorized shares with potential tax implications is critical. While there is no fee to authorize shares, excessive authorized shares can lead to higher annual franchise tax expenses. Therefore, it is advisable to consider your corporation's specific situation and future plans before deciding how many shares to authorize.

Consider the following factors when deciding:

How many shares do you currently need? How many shares do you anticipate needing in the future? What is the potential impact on your annual franchise tax bill? Do you need to provide flexibility for future growth?

Professional Recommendation: Authorizing Millions of Shares

Sometimes, it is advisable to authorize a very large number of shares, such as 10,000,000. This can provide significant flexibility, especially for startups. Having a large number of authorized shares allows for easy allocation among founders, investors, and future employees. It also ensures that employees or contractors who receive shares or options feel that they have received something substantial, as a 10000 share allocation is more impressive than a 100 share allocation, even if both represent the same percentage of ownership.

Disclaimer and Considerations

It is important to note that this guidance is not a substitute for professional legal advice. Always consult with a licensed attorney to ensure that your decisions comply with all relevant laws and regulations. Ignoring this advice to seek legal representation can result in adverse outcomes.

For those considering forming a Delaware corporation with a large number of shares, it is crucial to specify a low par value such as 0.0001 per share. This can prevent high annual fees and avoid potential legal issues down the line.