Par value is a financial term that refers to the minimum price at which a company can issue its shares. It is a legal requirement for most companies to have a par value for their shares. The par value of a share is usually a small fraction of its actual market value, and it does not reflect the actual worth of the company.
When a company decides to issue shares, it must set a par value for them. This is done during the process of incorporating the company. The par value is set by the company’s board of directors, and it is recorded in the company’s Articles of Incorporation.
The purpose of par value is to provide a legal minimum value for the company’s shares. In the past, par value was used as a way to protect investors from fraudulent companies that would issue shares with no real value. However, in modern times, par value has lost its importance, and many companies issue shares with a par value of only a few cents or even less.
Deciding what to set as the par value for your company can be a challenging decision. It is essential to consider various factors, such as the company’s financial situation, the current market conditions, and the type of industry in which the company operates.
If your company is just starting, it might be a good idea to set a low par value. This will allow you to issue more shares at a lower cost, which can help attract investors. On the other hand, if your company is well established and has a high market value, setting a higher par value might make more sense.
It is also important to consider the legal requirements in your jurisdiction when setting a par value. Some states or countries require a minimum par value for shares, while others do not.
Another important factor to consider when setting a par value is the impact it will have on the company’s balance sheet. The par value of a share is recorded as part of the company’s equity, and a higher par value will increase the company’s equity. This can be an advantage if the company needs to borrow money, as lenders often look at the company’s equity as a measure of its financial health.
In conclusion, par value is an essential financial term that companies must consider when issuing shares. It provides a legal minimum value for shares and can have an impact on the company’s balance sheet. When deciding what to set as the par value for your company, it is important to consider various factors such as the company’s financial situation, the current market conditions, and the legal requirements in your jurisdiction. Ultimately, the goal should be to set a par value that is fair, reflects the company’s value, and is in the best interest of the company and its shareholders.