Definition of assessable capital stock

What is taxable share capital?

Taxable share capital is share capital that could subject shareholders to debts greater than what they paid for their shares. Taxable share capital contrasts with non-taxable share capital, where shareholders can only lose the amount they have invested.

Holders of taxable shares may have to provide additional financing whenever a company needs more capital or in the event of bankruptcy or insolvency. Taxable share capital, however, is no longer issued as all shares are now non-taxable.

Key points to remember

  • Taxable capital stock is the capital stock of a corporation that subjects shareholders to other contingent liabilities.
  • A common form of stock issuance in the 19th and early 20th centuries, taxable capital stock is no longer issued.
  • Tax-free capital stock is the way shares are issued today, whereby shareholders’ loss is limited to only the amount they invest.
  • Taxable share capital was sold at a discount to face value, but shareholders could be held liable for additional capital if the company ran out of cash.
  • If an investor could not provide financing when required by the board of directors, they would lose their taxable shares.

Understanding taxable capital stock

When investors buy stocks these days, the only risk they face is the loss of the amount they invest. For example, if an investor buys $1,000 worth of shares in ABC Company and the company’s stock price drops to zero, his total, one-time loss would be $1,000. These are non-assessable stocks, which means that investors cannot be held responsible for more than the price of their investment.

On the other hand, taxable share capital obliges the shareholder to a liability greater than the amount he has invested, up to the par value of his shares.

Taxable share capital is a type of taxable stock that is issued in a primary offering. This class of shares would be issued to investors by companies at a price below their face value, with the understanding that the company could return to investors for more money at a later date.

For example, if ABC Company’s stock traded at $20, ABC would offer the stock to certain investors at a $15 discount; however, this would come with the stipulation that ABC could come back to them with a request for additional funds, up to the face value of the share. This is usually referred to as investors held to a call during insolvency and bankruptcy proceedings or when a company needs additional capital to fund growth or make an acquisition.

Insurable capital shares were a common type of stock issue in the 19th and early 20th centuries, but they no longer exist. As the securities are now tax-free, companies that need to raise additional capital can issue additional stocks or bonds instead. During insolvency, a company’s assets are sold and creditors are repaid in order of seniority. Those who are not reimbursed because the assets do not cover all the liabilities suffer a loss.

Most companies stopped issuing assessable shares in the 1920s. The last taxable shares were sold in the 1930s.

Assessable Stock Risks

Taxable share capital left shareholders at significant financial risk in that they would never know how much additional capital they would be called upon or when. If an individual did not have the additional funds needed, then they would automatically default on the shares and relinquish ownership, resulting in a loss of their initial investment.

It’s not hard to see why stocks eventually became non-assessable, as it reduced financial risk for investors. It also helps businesses because it makes buying stocks more attractive.

Special Considerations

It is generally considered that all stocks were assessable stocks in the 19th century, and companies moved from this practice to non-assessable stocks approximately within 10 years of World War I. At that time, the assessable nature of shares did not apply to bankruptcy and insolvency. cases, but rather whenever the board of directors decided that they needed additional capital. The board would simply appraise the stock for a certain value and expect the shareholder to deliver the amount.

The type of shares a company had were always listed in its articles of association so that investors were aware of possible future liability. Taxable share capital was popular with mining companies, especially since mining is capital-intensive and requires a lot of financing. Additionally, if significant mineral reserves are not discovered, a mining company may need additional capital to keep the business afloat.

However, the rebate on the purchase of assessable shares did not compensate for the additional risk of having to provide additional capital if the company’s coffers were depleted. If investors were unable or unwilling to pay for additional valuations, their shares would revert to the company, effectively giving them zero return on the investment they had already paid.

What is included in share capital?

Share capital is the maximum amount of common stock and preferred stock that a company is allowed to issue. Common stock gives the owner the right to a dividend and a vote in corporate governance, but they are usually last in line if the company goes bankrupt. Preferred shares have priority over dividends and company assets, but they generally do not have voting rights.

What is the difference between capital stock and common stock?

Share capital is the maximum amount of common and preferred stock that a company is allowed to issue. For public companies, this number is recorded on the balance sheet under the heading “equity”. Common stock gives the owner the right to vote on corporate governance and receive a dividend. This is different from preferred shares, which are senior to receive dividends but generally do not carry voting rights.

What does fully paid and non-taxable shares mean?

“Fully Paid and Non-Taxable” is a phrase printed on stock certificates to indicate that the original purchaser has paid the full price for the stock and no further obligations are due. This is different from taxable shares, which were sold to investors at a discount. However, owners of taxable shares could be asked to provide additional financing if the company runs into financial difficulties.

Sallie R. Loera