Stockholders’ Equity

Certificate of Stock Sample

 

What is Stockholders’ Equity?

Stockholders’ equity, also known as shareholders’ equity is the residual interest of owners in the net assets of the corporation which is measured and determined by the excess of assets over liabilities.

In general, the following are the elements that constitute the stockholders’ equity:

a.     Capital Stock

b.     Subscribed capital stock

c.      Additional paid in capital

d.     Retained earnings

e.      Revaluation increment in property

f.       Treasury stock

DEFINITION OF TERMS:

CAPITAL STOCK is the portion of the paid in capital which represents the total par value of the shares issued or the total consideration received in case of no-par stock.

SUBSCRIBED CAPITAL STOCK is the portion of the authorized capital stock that has been subscribed but not yet fully paid and therefore still un-issued.

ADDITIONAL PAIN IN CAPITAL is an account which broadly embraces the following:

a.     Capital received in excess of the par value or stated value.

b.     Donated capital – this represents capital received by way of gift or donation from stockholders or non-stockholders.

c.      Paid in capital from issuance of detachable stock from stock purchase warrants.

d.     Paid in capital from stock dividends.

e.      Paid in capital from reduction of par value

f.       Paid in capital from quasi re-organization.

RETAINED EARNINGS this represent the cumulative balance of periodic earnings, dividend distributions, prior period adjustments and other capital adjustments.

REVALUATION INCREMENT IN PROPERTY represents the excess of appraised value over the historical cost.

TREASURY STOCK is the corporation’s own stock that has been issued and then reacquired but not canceled.

What is the Nature of Capital Stock?

The word “capital stock” represents amount fixed in the articles of incorporation (or the Authorized Capital Stock) to be subscribed and paid in or secured to be paid in by the stockholders of the corporation, either in money or property or services, at the organization of the corporation, or afterwards and upon which the corporation is to conduct its operations.

The capital stock is divided into shares of stock which is evidenced by the Certificates of Stocks.

A share of stock represents the interest or right of a stockholder in the corporation which gives the stockholder four rights, as follows:

1. To share in the earnings of the corporation;

2. To vote in the election of directors and in the determination of certain corporate policies;

3. To subscribe for additional stock issues – this is the right of pre-emption or stock right;

4. To share in the net assets of the corporation upon liquidation.

A certificate of stock is the instrument or document that evidences the ownership of a share of stock.  A certificate of stock is issued only when the subscription is fully paid.

The capital stock may be par value stock or no-par value stock.

A par value stock is one with specific value fixed in the articles of corporation and appearing on the certificate of stock.  The purpose of the par value is to fix the minimum issue price of the shares.

A no-par value stock is one without any value appearing on the face of the certificate of stock.

A no-par stock has always an “issued value” or “stated value” based on the following considerations:

a. the articles of incorporation;

b. the board of directors

c. the holders of a majority of the share entitled to vote.

What is legal capital?

Legal capital represents the portion of the paid in capital arising from the issuance of stock which cannot be returned to the stockholders in any form during the lifetime of the corporation.

The establishment of legal capital is in conformity with the “trust fund doctrine” which holds that the assets of the corporation as represented by its capital stock are considered as trust fund to be maintained unimpaired to be used by paying corporate creditors in the sense that there can be no distribution of such assets among stockholders without paying first the corporate debts.