What is a non-taxable share?
A non-taxable share is a class of share in which the issuing company cannot levy its shareholders for additional funds in order to make new investments. The maximum liability assumed by the buyer of the shares is equal to the initial purchase price of the shares. Stocks issued by US companies and traded on US exchanges (and almost all other exchanges) are generally not assessable.
- Non-taxable refers to a class of shares that does not allow the issuer to demand an additional payment for the shares from the shareholders.
- Currently, most shares are not taxable.
- In the 19th century, companies issued evaluable shares at a discount on the understanding that the issuer could impose an appraisal to obtain more funds for shareholders in the future.
Understanding of non-assessable actions
A non-taxable stock is the opposite of a taxable stock, a type of primary offering now defunct. Taxable shares were the main type of shares issued in the late 1800s. Assessable shares were generally sold at a discount and allowed the issuer to raise additional funds from investors after the initial purchase of the shares.
For example, a stock with a par value of $ 20 could sell for $ 5. At some point, the issuer would provide investors with an evaluation of more funds, up to the full discounted amount (in this example, $ 15). If an investor refused to pay, the shares were returned to the issuing company.
Not surprisingly, assessable actions were unpopular. Most companies went to issue non-assessable shares in the early 1900s, and the last assessable shares were sold in the 1930s.
Although the shares were no longer selling at a discount compared to their share prices, investors were more confident in buying non-assessable shares because they no longer had to worry about the possibility that the issuer would force them to invest more money in the shares. after the initial transaction.
For any offering of shares that is registered with the Securities and Exchange Commission (SEC), it is standard to include the opinion of a law firm stating that the shares are “duly authorized, validly issued, fully paid, and non-taxable.”
The largest investment a non-taxable share buyer must make is the initial purchase price of the shares. The investor may lose the amount invested if the share price drops to zero. However, the issuing company will never require the investor to make additional investments as a condition of ownership of its shares.
When a stock is not taxable, it also means that if the issuing company goes bankrupt, shareholders cannot lose more money than they originally invested.
Example of a non-taxable share
Non-assessable shares have the word “non-evaluable” printed on their stock certificates.
This old Pennsylvania Power & Light Company common stock certificate for 20 shares, dating back to 1973, contains the phrase “fully paid, non-taxable common shares with no par or par value.” The phrase is common for repetitive language.