Almost two years ago, I wrote about how Delaware corporations with no-par-value stock can find themselves obligated to pay extraordinarily high franchise taxes (In Delaware, No-Par-Value Can Cost a Bundle). Yesterday, a reader of this blog pointed out that IncNow, an online incorporation service, virtually lures naive customers into this tax trap.
Here is what the reader reported to me:
- IncNow’s default assumption is that no-par stock will be issued.
- IncNow does not invite the user to specify a par value (in contrast to LegalZoom, for example, which does).
- IncNow’s representative said that the reader “could assign a par value to shares, under special requests at the bottom of the checkout form” [emphasis added].
In my opinion, considering par-value designation a “special request” is ridiculous on its face. But doing so with tens or hundreds of thousands of dollars at stake is grossly irresponsible. As a result, IncNow has been added to this blog’s Hall of Shame.
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I recently received (more than five years after this post was written) a polite, friendly email from IncNow’s president in response to this post. That email is too long to include in its entirety, so I will quote substantial portions below:
You may not be aware that we at IncNow call all customers who place orders for Delaware corporations with more than 1500 shares authorized that do not specify the par value in the comments box. We do this to explain the options to them over the phone before the Certificate of Incorporation is filed. One reason we don’t just “auto-file” a boxcar number of shares with zero par is because it drastically increases the filing fee (not just the annual fee – tax trap you mention)….
The reason we do not ask for par value is because it confuses potential customers who are not familiar with the par value concept (which seems to be most entrepreneur customers). We previously had this on our order form and people would put down what they expected to sell the shares for (or the market value). We would then have to correct them before the filing. What was an even bigger problem was people being confused by the concept in general and abandoning the order form (paralysis of analysis). In about 2003 we removed this par value option and it doubled the number of orders by reducing the order form abandonment rate by half.
We have thought of other ways to hide the par value unless the potential customer lists more than 1500 shares then try to provide more information on the topic and allow the customers to fill-in the information. That also results in confusion because the customer does not read the explanation or understand it… We are still considering how to explain it more clearly to add it back to the order form….
We have found it is better to suspend an order and contact the customer to ensure they understand the concept and make a more informed decision.
Dana H. Shultz, Attorney at Law +1 510-547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.