Forming a New York state corporation is often the first step that entrepreneurs take before commencing operations. These entrepreneurs often think that a corporation is the structure that favors them for a variety of reasons (IPO, multiple traunches of capital, stock options, etc.) And coupled with the apparent ease of online filing, they use the basic filing options available to them (i.e., a form). Unfortunately, that often means no forward planning as to the number and variety of shares the corporation is formed with.
The standard New York incorporation form used generally provides for 200 non par value shares, which is far beneath the needs of most emerging growth companies that chose the corporate route. Indeed, the 200 share threshold is likely only useful for “closed corporations” (i.e., private corporations with a handful of shareholders, such as the family company). In a scenario that requires the grant of stock to a variety of founders, consultants, angels, and other parties, it is immediately clear that 200 shares will not suffice. In such a scenario, the capital stock (“capital stock” simply means all stock, including all classes) supply will have to increase to meet the various early stage growth demands.
If you have incorporated in New York State or some other state that imposes a share tax on the issuance of new shares, then you should be wary of the number and class of shares your company issues at any stage of its growth. New York State imposes a share tax on the issuance of non par value shares that can be as high as $.05/share. So if there is a new company that was formed with the standard 200 share form, but now needs 10,000,000 shares to satisfy its needs (say for example, there needs to be shares for three founders and two consultants, where some of the founders have bought in a few percentage points of stock at a $1,000,000 valuation), it will have to file a certificate of amendment with the New York State Department, enlarging its capital stock pool. Although this seems simple enough, if the share pool was increased from 200 non par value shares (non par value means there is no minimum price at which the corporation is obligated to sell the stock) to NPV 10,000,000 shares, the corporation would be hit with a share tax, under section 180 of the New York Tax Law, of $.05/share minus the original share tax paid upon formation of the corporation (which in this case means $500,000 – $10 or $499,990). Obviously, that is not a palatable situation for any company, mature or otherwise. One has to be aware of this tax to properly structure their capital stock pool accordingly.
An alternative is to issue stock with a minimal par value. Hence, in the above example, the corporation can opt to issue 10,000,000 shares of stock with a par value of $.001/share. This will only make them liable for a $10.00 tax under section 180.
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