“Par value,” also called face value or nominal value, is the lowest legal price for which a corporation may sell its shares. It has nothing to do with how much a corporation’s shares are actually worth or are sold for. Rather, it is an antiquated legal and accounting concept mandated by the corporation laws of some states.
In some states, when a corporation is formed, the articles of incorporation must set a “par value” for its stock. Everyone who buys shares in the corporation, including the corporation’s founders, must pay at least this amount. If they pay less, they’ll owe the corporation the difference.
For example, if you set the par value for your corporation’s shares at $1, all purchasers of the stock must pay at least this amount for every share they purchase. If you purchase 10,000 shares, you’ll have to pay at least $10,000 for them. If you pay only $5,000, you’ll owe your corporation another $5,000. If your corporation later goes out of business, its creditors can sue to force you to pay that remaining $5,000 to your now defunct corporation to help pay off its debts.
The term par value can be misleading because it has nothing to do with how much a corporation’s shares are actually worth. It is only a minimum legal value. A corporation’s board of directors may require investors to pay far more than par value for the corporations’ shares. For example, you can establish a par value of $.01 per share, but require investors to pay $10 per share. In other words, you can sell your stock for whatever the market will bear. If your incorporated business proves successful, your shares should become worth far more than their par value.
It is up to the incorporators to decide what the par value of the corporate stock will be. Typically, large companies establish a par value of one cent or a fraction of one cent per share. This way they can issue many shares without the founders or other initial purchasers being legally required to pay huge amounts of money for them. For example, the par value for shares of Apple, Inc. is $0.00001 and the par value for Amazon stock is $0.01. Small corporations that intend to have only one or a few shareholders sometimes issue stock at $1 par value. If you have printed stock certificates, their par value should be printed on the certificate.
When shares have a par value, the amount shareholders pay for them in excess of par is accounted for as paid-in capital on the corporation’s balance sheet. For example, if a shareholder pays $5 for 1000 shares with a par value of $1, $4,000 would be credited to the corporation’s paid-in capital account and $1,000 to the common stock account.
Some states allow corporate stock to be issued with no par value. In this event, “no par value” should be printed on the stock certificates. Purchasers of no par value shares don’t have to worry about being liable to corporate creditors if they pay too little for the shares. For accounting purposes, the entire purchase price for no par shares is credited to the common stock account, unless the company decides to allocate a portion to surplus. In some states, this allocation to surplus must be done within a certain specified time after the stock is issued or it remains as capital which could affect the company's ability to make distributions or pay dividends.