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The legal capital per share of stock assigned at a corporation's formation is known as par value. It serves legal, minimum capitalization, and accounting purposes. Understanding par value is crucial for comprehending corporate finance.


Explanation:

Understanding Legal Capital


The legal capital per share of stock assigned when a corporation is first established is referred to as par value. This is an important concept in corporate finance and accounting.


When a corporation issues shares of stock, it often assigns a nominal value, called par value, to each share. This value does not necessarily reflect the market value of the shares but serves several legal and accounting purposes:



  • Legal Requirements: Many jurisdictions require that shares have a par value when organizing a corporation.

  • Minimum Capitalization: Par value can help establish the minimum amount of equity that must be maintained by the corporation to protect creditors.

  • Accounting Practices: The par value is used in accounting to determine the common stock account's balance.


For example, if a corporation issues 1,000 shares of stock with a par value of $1, the legal capital would be $1,000. If shares are sold above par value, the excess is generally recorded in a separate account known as paid-in capital.


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