S-Corporation Stock Price

[doskzorak]

Good evening Everybody,

I am new to the forum and am the accountant for one of my work friends' company. At the risk of starting a new thread on something that has already been discussed- and I searched the forums before contemplating making this post- I have searched the Internet for the answer and have so far found nothing. So, again, I apologize if I am resurrecting and old thread with this new one.

One of my work partners will be forming an S-corporation in the coming months. One question I have when filing the articles of incorporation for a company with this structure, is the par value of the stock an arbitrary figure, or is there a formula or something similar to determine the initial par value? Any suggestions/helpful info would be greatly appreciated.

Thank you in advance.

- Dosk

[kcjenkins]

In most states, the articles of incorporation must state the maximum number of shares of stock that can be issued. There is no need to actually issue the maximum number of shares - you can issue a lesser number. For example, if a corporation has two shareholders, you can authorize a maximum of 1,000 shares, but give each shareholder only 250 shares. This way, you have the flexibility to add more shareholders. Otherwise, if additional shares were needed, the articles of incorporation would have to be amended. There is no maximum on the number of shares that can be authorized. However, some states, notably Delaware and Nevada, do base their annual corporation fee on the number of authorized shares.

In some states, notably Delaware and Nevada, the "par value" must be stated on the articles. Par value is a dollar value assigned to each share, regardless of its market price. Par value is simply for accounting and tax purposes, since stock can be sold at whatever price a buyer is willing to pay. The corporation, however, cannot sell stock for less than its par value. And since some states base their annual corporation fee on the total par value of the stock, it is advisable to choose a low par value, such as 0.01 or even 0.001 per share. I typically set par value at $1, especially with unsophisticated clients, but it's really a judgement call.

[WITAXLADY]

the stock price was referred to in the post about switching the Sch C to an S corp - how does that tie in please?

Thx D

[kcjenkins]

Generally, when changing from a Sch C or a 1065 to an S corp, [or a C corp, for that matter] the business assets are contributed to the corp in a tax-free exchange for stock. So if, for example, you are contributing $200,000 of equipment, etc with a book value of $100,000, and you set par at $1, you'd issue yourself 100,000 shares at $1. Debit Equipment $200,000 credit Acc Depreciation $100,000, and credit Common Stock $100,000.

[OldJack]

• I agree that book value is tax basis, but disagree with using book value for stock value recorded on the corporation books as it is a standard accounting method to record the stock value at FMV. Most of your web research only talks about tax basis and therefore does not address the recording on the corporate books. FMV booking is especially needed where you have two 50-50 owners when one shareholder contributes cash and the other contributes property of equal value. Here is a quote on how one accounting textbook states for recording stock value on the corporation books:

  >>-----

  McGraw-Hill

  Noncash Acquisitions

  Companies sometimes acquire assets without paying cash but instead by issuing debt or equity securities, receiving donated assets, or exchanging other assets. The controlling principle in each of these situations is that in any noncash transaction (not just those dealing with property, plant, and equipment and intangible assets), the components of the transaction are recorded at their fair values. The first indicator of fair value is the fair value of the assets, debt, or equity securities given. Sometimes the fair value of the assets received is used when their fair value is more clearly evident than the fair value of the assets given.

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