Stated value stock is no-par common stock to which the board of directors has assigned a small per-share dollar amount by resolution. That figure becomes the company’s legal capital floor: it’s the portion of each share’s issue price that gets locked into the Common Stock account on the balance sheet. Anything investors pay above the stated value goes into a separate equity account called Additional Paid-in Capital. Boards almost always set the number at a token level, often $0.01 or $1.00, because a higher stated value restricts the company’s ability to pay dividends and repurchase shares later.
How the Board Sets Stated Value
Stated value is not fixed in the corporate charter. The board adopts a resolution assigning a per-share amount, and that amount then determines how the sale proceeds get split on the books. A company selling shares at $20 each with a $1 stated value must keep $1 per share in legal capital; the other $19 flows to Additional Paid-in Capital.
The incentive runs in one direction. The higher the stated value, the more shareholder money gets trapped as legal capital and the less flexibility the company has to return capital later. A $0.01 stated value on stock trading at $50 locks up almost nothing. That’s the point. Boards want the accounting benefit of a clear legal capital figure without the operational constraint that comes with a large one.
Stated Value Versus Par Value
Par value is a fixed number written into the corporate charter at formation, and it historically represented the minimum price at which shares could legally be sold. Issuing shares below par produced “watered stock,” which exposed the original buyers to personal liability to creditors for the shortfall. If the market price later fell below the number written into the charter, the company had a problem.
Stated value avoids that trap. Because the board sets it by resolution rather than embedding it in the charter, adjusting it doesn’t require a formal charter amendment. And because companies keep the figure nominal, there’s essentially no risk of selling below it. The classic watered stock liability is off the table.
That functional advantage drove a broader change in corporate law. Beginning in 1980, the drafters of the Model Business Corporation Act removed par value, stated capital, and treasury share concepts from the model statute entirely. The MBCA is now the basis for corporate statutes in 32 states and the District of Columbia.1American Bar Association. Model Business Corporation Act (2016 Revision) Launches In those jurisdictions, solvency-based tests have largely replaced the par value and stated value distinction for distribution purposes. In states that still follow the traditional legal capital framework, most notably Delaware, stated value remains the mechanism companies use to set that floor.
How It’s Recorded on the Balance Sheet
When stated value stock is issued, the proceeds split across two equity accounts. The Common Stock account holds the legal capital portion, calculated as stated value per share times shares issued. The remainder goes into Additional Paid-in Capital, sometimes labeled “Paid-in Capital in Excess of Stated Value.”
A Worked Example
A corporation issues 100,000 shares of common stock with a $0.50 stated value at $15.00 per share. Total cash received is $1,500,000. The entry:
- Cash (debit): $1,500,000, the full amount received.
- Common Stock (credit): $50,000, which is 100,000 shares times the $0.50 stated value.
- Additional Paid-in Capital (credit): $1,450,000, the premium over stated value.
The debit equals the sum of the two credits. On the balance sheet, both accounts sit under a broader Paid-in Capital heading within shareholders’ equity, separate from Retained Earnings.
When Shares Are Issued for Something Other Than Cash
Shares aren’t always sold for cash. Under the Model Business Corporation Act, the board can authorize shares in exchange for any tangible or intangible benefit to the corporation, including property, services already performed, or contracts for future services. The board determines the fair value of what the company received, and the same split applies: stated value per share to Common Stock, remainder to Additional Paid-in Capital. The board’s determination of adequate consideration is generally conclusive for whether the shares are validly issued and fully paid.
What Legal Capital Actually Restricts
In states that follow the traditional legal capital model, the total stated capital, meaning stated value multiplied by all outstanding shares, cannot be distributed to shareholders. Dividends, buybacks, and other distributions must come from the surplus above that floor: Additional Paid-in Capital and Retained Earnings. That is the protection creditors are meant to get from the legal capital rule.
This is why boards keep the number low. A company with 10 million shares outstanding and a $5 stated value has $50 million locked as legal capital. Drop the stated value to $0.01, and only $100,000 is restricted. When the board later wants to declare a dividend or authorize a repurchase program, the difference is decisive. A high stated value can leave an otherwise healthy company legally unable to return capital to shareholders.
MBCA states have replaced this framework with solvency-based distribution tests. In those jurisdictions, a company can make distributions as long as it remains able to pay its debts as they come due and its total assets exceed total liabilities. Stated value is less relevant there, though many corporations still assign one for accounting consistency.
Where Stated Value Still Binds
For corporations in MBCA jurisdictions, stated value is mostly an accounting convention. The real distribution limits come from the solvency tests, not the legal capital floor. But in states that retain traditional legal capital rules, stated value continues to do real work in setting what portion of equity is off-limits for distribution.
Federally chartered stock savings associations sit in a different category. Their stated value requirement is embedded directly in the charter, and it carries a harder constraint: shares cannot be issued for consideration less than the stated value.2eCFR. 12 CFR 5.22 – Federal Stock Savings Association Charter and Bylaws That rule echoes the old par value floor, and it’s a reminder that whether stated value is a soft accounting choice or a hard legal limit depends on whether it lives at the board-resolution level or in the charter itself.
Tax Treatment for the Issuing Corporation
Issuing stated value stock is not a taxable event for the corporation. A company does not recognize gain or loss when it receives money or property in exchange for its own stock, including treasury stock, regardless of whether the shares have par value, stated value, or neither.3GovInfo. 26 USC 1032 – Exchange of Stock for Property Stock issuance is treated as a capital transaction, so the full amount received flows into the equity accounts without creating a tax obligation.4Internal Revenue Service. Revenue Ruling 99-57
The same nonrecognition applies when a corporation uses its shares to pay for services. The company doesn’t recognize gain on the stock transferred. The recipient recognizes ordinary income equal to the fair market value of the shares, and the corporation takes a corresponding compensation deduction.
SEC Disclosure for Public Companies
Publicly traded companies follow SEC Regulation S-X when presenting stockholders’ equity. For each class of common stock, the balance sheet must show the number of shares issued or outstanding, the dollar amount, the title of the issue, the number of shares authorized, and any conversion terms.5eCFR. 17 CFR 210.5-02 – Balance Sheets Additional paid-in capital, retained earnings, and accumulated other comprehensive income appear as separate line items, though Regulation S-X permits combining the additional paid-in capital line with the related stock caption where appropriate. That’s why some balance sheets show a single “Common Stock and Additional Paid-in Capital” line rather than two.