How to Issue Shares in Delaware Corporation?
Keep reading to understand how to issue shares in a Delaware corporation.
Just started a Delaware corporation and not sure how to move ahead and grow it? Or how to start issuing shares in your Delaware corporation to your founders? Well for you to be able to grow your company, you may need to raise capital.
Confused? Keep reading to understand how to issue shares in a Delaware corporation.
A Delaware corporation is a company that is legally registered in the state of Delaware, but the corporation can conduct business in any state. It was in the 19th century when Delaware began to change many of its laws, making its environment more business-friendly for everyone. The main aim was to attract businesses from other states. And as time passed, Delaware has become a respected state and one of the top choices for starting a business by many entrepreneurs. Even if the owner wants to conduct business outside the state, incorporating in Delaware brings a lot of benefits.
Types of Delaware Corporation
Before you can incorporate your company in Delaware, you need to decide on the type of corporation you want your company to be. Delaware offers a lot of options. These include:
- General Corporation: This is the most common kind of corporation as it has the ability to go public and raise capital easily by selling Delaware corporation stock to investors. It has a formal structure where the shareholders own the company with stock, which helps attract venture capitalists. The directors run the company and are the ones in charge of the overall management, while the officers take care of all the day-to-day business.
- Close Corporation: The close corporation was created for tight-knit group people, as it cannot have more than 30 shareholders. In this type of corporation, it is not easy to transfer stock as compared to a general corporation. And the shareholders have the right of first refusal to buy stock before the shareholder can sell it to an outsider.
- Public Benefit Corporation: The public benefit corporation was created to make it legal for the company to act responsibly, ethically, and morally in regard to society, the natural world, the environment, and the world at large. Even though this type of corporation is formed just like a general corporation, the Certificate of Incorporation of a Delaware Public Benefit Corporation has to be clearly marked to demonstrate that the company is a Public Benefit Corporation.
- Non-Profit Corporation: The name says it all. It is a company run by the board of directors and it does not have any shareholders. A few non-profit corporations have members who do not own the company, but have the right to vote for the board of directors. If there are no members, the board members choose who can be on the board. To form this corporation, you will need to form a non-stock corporation and then apply to the IRS for non-profit status. Once approved, the corporation would not have to pay any taxes, although it has to file informational returns, with the names and addresses of the board members and some financial information.
Issuing Shares for Delaware Corporation
In a general Delaware corporation, you can easily issue shares to outsiders of the company in exchange for funding. A corporation gets a list of authorized stock when the company is incorporated, from which you can then issue the shares from.
Shares of stock are the units of equity ownership in a corporation. These are first authorized by the Certificate of Incorporation of the company where you get the number of shares that the company has in total. Authorized shares are the total number of shares the company owns and can sell. After your company incorporates, you can increase the number of shares after a majority of shareholders and directors approve it. And these can then be used to raise capital as needed.
What is a no-par stock?
A no-par stock is a stock issued that has no face value. This means that these Delaware corporation stock can be issued to shareholders without the exchange of services, goods, or funds. Just know that having a no par value will not restrict the selling of your shares to investors, and the price would be determined by the board of directors upon issuance. This means that it works just like Delaware corporation stocks that have a par value. In Delaware, you can hold up to 1,500 shares of no-par stock fee-free.
When do I issue stock for a Delaware corporation?
When to issue corporate stock is entirely up to you and the company. But before you do this, remember to issue yourself common stock early so that you can keep a higher ownership and interest in the company. And if you have other initial investors, they too will expect to receive common stock early in the formation of the corporation.
As time goes by, you will get more investors and as you get them, you will have to issue the shares of your Delaware corporation. When you see yourself issuing a lot of common stock to investors, it might be time to issue yourself and the senior investors preferred stock.
How much stock do I need?
The Delaware Franchise Tax fee is based on the number of stock shares you have and their par value. So, it is always better to keep them as low as possible. If your company has just 5,000 authorized shares or less, you will be paying a minimum annual Franchise Tax of $175, as you will be considered to be a minimum stock corporation. This fee is in addition to the annual report filing fee of $50.
But if your corporation has more than 5,000 authorized shares, you will have to file an annual report and also pay an annual Franchise Tax on the total number of authorized shares the company owns. In fact, even though you can have 5,000 authorized shares and still pay low tax, a lot of lawyers recommend to begin with 1,500 shares of no-par stock as placing a small par value on your stock can save you from paying a lot of tax. In fact, there is an extra filing fee for filing more than 1,500 no-par shares.
In case you choose to issue par-value stock, to avoid the extra formation fee, your total equity valuation should be less than $75,000 so that you can stay within the minimum initial filing fee. Obviously, you do not want to pay a fortune to start your corporation, and as you grow, you can take up more shares. But initially it is always a good idea to keep it low. To help you here are some calculations that allow you to stay within the minimum initial tax when you open your company:
- 15,000 shares at $5.00 each = $75,000
- 150,000 shares at $0.50 each = $75,000
- 1,500,000 shares at $0.05 each = $75,000
- 15,000,000 shares at $0.005 each = $75,000
Stock Amendment in Delaware Corporation
A great benefit of incorporating a company in Delaware is that it offers flexibility with corporate structure. This means that you can enjoy the benefit of stock amendments. In short, you can increase or decrease the number of authorized corporate stock in your company. Even if you do not need it, this is a benefit that your Delaware corporation offers you where you can choose the number of shares based on your needs.
Let us take an example to understand this and say that you and your friend start a company. With just two owners, the ownership will be split in half, that is 50/50. To keep everything simple, your company initially authorizes 2,000 shares of common Delaware corporation stock and each partner receives 1,000 shares. Let us now move ahead to some years in the future where the company is growing really fast, and you want to add more people in your company. In this case, you will have to look for a way to increase the number of authorized shares.
You might also need to add another class of stock, such as preferred shares. This is so that the owners can own the class of preferred stock while the new people can purchase the common stock of the company. On the other hand, maybe you had normally formed the company with 5,000,000 authorized shares since you were going to have many investors join in. But some issues came up and your company didn’t grow as it was supposed to. You still want to run the company, but with a lower number of shares.
How to make stock amendments in Delaware Corporation?
For you to make the stock amendments, you will have to follow these steps:
- Hold a company meeting and get the appropriate authorities of the company to approve the changes to the stock number of the company.
- Create the Certificate of Amendment for giving to the Secretary of State of Delaware. Add in the details including the new number of authorized shares, par value, and/or classes of stock in this Certificate.
- Get the authorized officer of the company to sign the document and file the certificate with the state.
To file the certificate, you will have to mail it to the Secretary of State’s office. As soon as you file it, your stock amendment would become official. Just so you know, you can restate the initial article instead of filing an amendment for a filing fee of just $194.
Setup Your Delaware Startup Easily
If you want to start a Delaware company, we can help. From the filing of the company incorporation with the Secretary of State to every other necessary filing, we can assist you in starting your corporation in Delaware. Our sister company IncParadise is one of the leading incorporation service providers in Delaware. The team will take care of everything you need.
Issue & Manage Delaware Corporation Stocks on Eqvista
Now that you have opened your Delaware corporation, you can easily issue stock of the company by using Eqvista, and start managing your Delaware corporation shares. Eqvista helps companies issue and manage shares on our online cap table software.
Not just that, you will also be able to use the app to make better financial decisions. Eqvista features a waterfall analysis tool and round modeling tool that would help you see how much your ownership will be diluted when you issue more shares.