Corporation shares and par value

[NotEasy]

Is it possible that a corporation did not issue shares when it started?

I have a new client who owned a S-corp. When I asked him the number of shares issued and the par value in order to calculate the capital stock, he looked at me with wide eyes without the slightest idea of what I was asking about. Then he swore he did not issue stocks when he set up the corporation. Is it possible?

[JohnH]

Ask him to show you the 2553. He had to enter this information on it in order to get the s-corp election approved.

[NotEasy]

Ask him to show you the 2553. He had to enter this information on it in order to get the s-corp election approved.

I did. The problem is that the election was made like 5 years ago and he could not find anything now.

By the way, do you also think it is impossible for a corporation to have no shares issued ( or shares issued without par value)?

[Maribeth]

Is it possible that the corportion never issued any stock? Yes, it is, This happens a lot, especially with the do-it-yourself group. He probably does not have any corporate minutes and shareholder agreements for the corporation's 5 year history, either.

If he absolutely cannot provide you with any information, you will just have to use the balances on the balance sheet at the beginning of the year.

You might also ask him if he used an attorney when he incorporated. If he did, the attorney should have the paperwork.

Also, check with your state's Secretary of State. There should be information from the original incorporation and the subsequent annual filings.

Maribeth

[BOB W]

No Par stock is very common. I usually take whatever personal money is used to start the corporation as Capital Contribution. Most times it is $100. Or the cost of forming the corporation is Organizational Expense. Debit to organizational expense, credit to capital investment to purchase common stock.

[taxxcpa]

State laws

The state law may require a certain amount of capital to start a corporation. In Texas it has to be $ 1000, but I believe 'services' can be counted as capital contributed. I haven't looked at the rules for several years, but I recall something like that. Most TX S-corporations have at least $ 1000 in common stock.

[NotEasy]

If he absolutely cannot provide you with any information, you will just have to use the balances on the balance sheet at the beginning of the year.

Maribeth

The problem is that the balance of the capital stock at the beginning of the year (end of last year) in no way can be correct. There is over $100,000 capital stock came from nowhere while he has contributed not more than $60,000 to the S-corp through the years. I want to correct it, or at least make it as accurate as possible based on the limited information that I have.

[NotEasy]

No Par stock is very common. I usually take whatever personal money is used to start the corporation as Capital Contribution. Most times it is $100. Or the cost of forming the corporation is Organizational Expense. Debit to organizational expense, credit to capital investment to purchase common stock.

Let's assume there is indeed no par value and that he put $50,000 to the S-corp bank account when it started, would you put the $50,000 as capital stock?

[BOB W]

Let's assume there is indeed no par value and that he put $50,000 to the S-corp bank account when it started, would you put the $50,000 as capital stock?

I would not. I would break it up and create a loan from officer account with most going into loan from officer (paperwork needed). Just remember that I deal with "Mom/Pop" type businesses. Larger small businesses may have financing needs with banks or "backers" and Capital Account becomes very important with Loans From Officer not the best for "outside" viewing.

[NotEasy]

I would not. I would break it up and create a loan from officer account with most going into loan from officer (paperwork needed). Just remember that I deal with "Mom/Pop" type businesses. Larger small businesses may have financing needs with banks or "backers" and Capital Account becomes very important with Loans From Officer not the best for "outside" viewing.

Thank you. So how would you break it up? Do you use a formula?

[ChEAr$]

To answer your original question, ALL corporation MUST have outstanding capital
stock. Par value, or no par value, has nothing to do with state requirements (all states) that stock actually be issued.

It could be that whoever helped with the original corporation simply made up the corporate book and did not fill in the original stock certificates. Get that book,
whereever it is, and you will see the original meeting of stockholders which
authorized maximum number of shares AND original number to be issued.

[NotEasy]

To answer your original question, ALL corporation MUST have outstanding capital
stock. Par value, or no par value, has nothing to do with state requirements (all states) that stock actually be issued.

It could be that whoever helped with the original corporation simply made up the corporate book and did not fill in the original stock certificates. Get that book,
whereever it is, and you will see the original meeting of stockholders which
authorized maximum number of shares AND original number to be issued.

It's a 1 man S-corp so I doubt there was an original meeting or corporate book. In all likelihood, the owner just filled up whatever papers needed to get incorporated and filed it. And somehow they let him get incorporated. He is now trying to check with the Secretary of State to see if there is any record about the number of shares issued and the par value.

But we will be stuck if nothing can be found. He did tell me how much money he put into the bank account when the business started, how much he has contributed and withdrawn since the business started. The major problem is how to derive the capital stock and paid in capital out of the limited information. How would you handle the situation?

[ChEAr$]

It's a 1 man S-corp so I doubt there was an original meeting or corporate book. In all likelihood, the owner just filled up whatever papers needed to get incorporated and filed it. And somehow they let him get incorporated. He is now trying to check with the Secretary of State to see if there is any record about the number of shares issued and the par value.

But we will be stuck if nothing can be found. He did tell me how much money he put into the bank account when the business started, how much he has contributed and withdrawn since the business started. The major problem is how to derive the capital stock and paid in capital out of the limited information. How would you handle the situation?

Your questions will eventually be answered by secretary of state. When a corporation is formed, articles of incorporation which contain answers to two important questions are filed; number of shares authorized and initial number of shares to be issued. (Note:
a corporation is not officially organized until said initial number of shares are issued. Yes, I know what some people do not do! grin)

If this is a state in which the articles of incorporation are filed not directly with the state but instead with the local country probate judge's office, there is probably a copy of everything on file at court house.

[NotEasy]

Your questions will eventually be answered by secretary of state. When a corporation is formed, articles of incorporation which contain answers to two important questions are filed; number of shares authorized and initial number of shares to be issued. (Note:
a corporation is not officially organized until said initial number of shares are issued. Yes, I know what some people do not do! grin)

If this is a state in which the articles of incorporation are filed not directly with the state but instead with the local country probate judge's office, there is probably a copy of everything on file at court house.

He called the Secretary of State and they told him to look at the Articles of Incorporation. Then somehow he could find it (and I am honestly surprised that he could find it due to how disorganized his record keeping system is). But, in the Articles, it only says 2,000 shares would be issued without mentioning the par value. If the shares do have a par value, would it necessarily be mentioned in the Articles? Well, actually the more important question is: if the Articles of Incorporation does not mention the par value, can we take it to mean that the stocks have no par value?

[NotEasy]

ChEAr$...this thread has been pushed to the 2nd page so maybe you did not see my reply. I am very curious to know your insight regarding this situation.