stated capital Legal Capital The par value of all of a company's shares outstanding. Legal capital may not be distributed as dividends, or as anything else.
What is legal capital?
What is Legal Capital? Legal capital is that amount of a company's equity that cannot legally be allowed to leave the business; it cannot be distributed through a dividend or any other means. It is the par value of common stock and the stated value of the preferred stock that a business has sold or otherwise issued to investors.
What is the stated capital of a corporation?
Stated capital is the aggregate par value of all shares outstanding. A corporation must retain the stated capital; it cannot be distributed to shareholders as dividends. Companies commonly adopt a $0.01 stated value for their shares in order to minimize this requirement. Many states allow corporations to have no stated value on their shares.
What is the meaning of'stated capital'?
1 Answer 1. "Stated Capital" is the nominal value (or "par" value) of all the outstanding shares of a company. When a company issues shares each has a nominal price, say EUR $1.00$. But of course they may be sold for more (as far as I know, it is forbidden to issue a share and receive an amount less than its nominal value.
What is a stated capital account (SCA)?
A corporation’s Stated Capital Account is a notional account a corporation must maintain for each class and series of issued shares. Simply speaking, the Stated Capital Account represents the consideration or payment received by the corporation from its shareholders in exchange for the issuance of its shares.
What is a corporation’s Stated Capital Account?
A corporation’s Stated Capital Account represents the consideration or payment received by the corporation from its shareholders in exchange for th...
What is a corporation’s paid up capital (PUC) account?
Paid-Up-Capital or PUC is a concept under the federal Income Tax Act (ITA). PUC is the precise amount a shareholder pays for his or her shares. Gen...
Are the amounts in a corporation’s Stated Capital Account and Paid Up Capital (PUC) accounts the sam...
The Stated Capital Account can increase to a figure larger than the PUC under certain circumstances. For example, the Stated Capital Account will i...
What are the circumstances under which the Stated Capital Account is less than the PUC account?
Reductions from stated capital may occur under subsection 38(1) of the CBCA for the purpose of reducing or extinguishing liabilities in respect of...
How can I use a corporation’s Stated Capital and Paid Up Capital accounts for achieve tax savings?
Reductions or increases to the Stated Capital Account can be a useful tax planning tool as the distribution from PUC is one of the few distribution...
What is legal capital?
Legal capital is an amount of a firm’s equity that is not allowed to leave the business, an amount that cannot be distributed to shareholders in the form of dividends or as anything else. It is referred to as the par value of the Firm’s common or preferred stock issued to the investors. The concept of this capital is only applicable ...
Why is face value set at a minimum price?
Face value is often set at a minimal price in order to protect investors by preventing firms to not issue stocks at a price lower than the par value. The concept of legal capital was first introduced to produce a reserve for the company’s creditors in the event of default.
What is dividends in business?
Dividends Dividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company. read more. . Nowadays, companies set very low par values because ...
Why are companies' par values so low?
. Nowadays, companies set very low par values because of which legal capital is so less that it could provide very low protection.
Why was the Cash Reserve concept first implemented?
This concept was first implemented in order to protect the Firm’s creditors in the event of default or any financial crisis by maintaining a cash reserve, especially for such events.
Do you have to pay dividends to shareholders?
It cannot be distributed to the Firm’s’s shareholders by any means. A firm does not need to pay dividends to the shareholders if doing so would damage its Legal Capital. A firm does not need to acquire capital shares if such activity could weaken this capital. This capital ensures that the value of assets of a firm should always exceed the value ...
Can you apply capital to a stock that has been issued?
The concept of this capital is only applicable to stocks that have been issued. It cannot be applied to any stock that is approved for issuance but has not been issued yet to investors.
What is stated capital?
Stated capital means the sum of (a) the par value of all shares with par value that have been issued, (b) the amount of consider- ation received for all shares without par value that have been issued, except such part of the consideration therefor as has been allocated to surplus in a manner permitted by law , and (c) such amounts not included in classes (a) and (b) as have been transferred to state d capital, whether upon the issuance of shares or otherwise, less reductions from such sum as have been effected in a manner permitted by law.
How is state capital determined?
Stated capital is determined using the value of shares that have been issued.
What is a Stated Capital Account?
A corporation’s Stated Capital Account is a notional account a corporation must maintain for each class and series of issued shares. Simply speaking, the Stated Capital Account represents the consideration or payment received by the corporation from its shareholders in exchange for the issuance of its shares.
What is paid up capital?
Paid-Up-Capital also comes into play in various corporation reorganizations . When conducting a section 85 tax neutral transfer of property, s.85 (2.1) of the Income Tax Act (ITA) limits the PUC of the new shares to that of the adjusted cost base (ACB) of the property transferred in. In this way, the ACB value, which is now the new PUC value, can be distributed back to the shareholder tax free. PUC is also limited on section 86 share exchanges where the ITA requires the PUC of the new converted shares to be kept down to the PUC of the prior shares. Under s.87 (3) of the ITA concerning amalgamations, the ITA aggregates the PUC of the amalgamating corporations so that the actual PUC from the predecessor corporations remains consistent in the new amalco (corporation resulting from the amalgamation).
Why do private companies use a new class of shares for each new investment or issuance?
For this reason, private corporations will typically utilize a new class of shares for each new investment or issuance to keep the PUC reflective of its purchase price to each shareholder. The determination of PUC starts with the Stated Capital Account. The PUC can be less than the account, but never more.
What is PUC in tax?
Paid-Up-Capital or PUC is a concept under the federal Income Tax Act (ITA). PUC is the precise amount a shareholder pays for his or her shares. Generally speaking, PUC can be returned to shareholders free of tax (including Part XIII withholding tax), whereas other distributions of capital are taxable as either a dividend or a taxable shareholder ...
What is PUC in accounting?
PUC is the precise amount a shareholder pays for his or her shares. Generally speaking, PUC can be returned to shareholders free of tax. The Stated Capital Account holds the corporation’s Paid-Up-Capital (PUC). Are the amounts in a corporation’s Stated Capital Account and Paid Up Capital (PUC) accounts the same?
How much is the PUC per share?
For example, if a shareholder subscribes for and purchases 100 common shares in a corporation’s capital, and each share is purchased for $1.00, then the shareholder will pay $100 into the Stated Capital Account and the PUC per share will be $1.00. However, if the corporation thereafter takes on 200 new investors for an investment of $20,000, then the PUC per share will increase to $67.00 ($20,100 / 300). The original investors who started with a PUC of $100 for 100 shares would then have a total PUC of $6,700.
What is the difference between PUC and Stated Capital Account?
So, how is it possible that PUC represents the amount paid by shareholders into the corporation in exchange for shares, and the Stated Capital Account represents the amount received by the corporation for the issuance of its shares – yet these two figures can be different?
What is the stated capital of CBCA shares?
Where a CBCA corporation issues shares by declaring a stock dividend, the stated capital of the shares issued is the declared amount of the dividend (which may be nominal). Under the Ontario Business Corporations Act (OBCA), the whole or any part of the declared amount of the dividend can be added to the stated capital account ...
What is the amount added to the stated capital account of the shares to be issued?
For eligible property or services, the amount added to the stated capital account of the shares to be issued is generally the full amount of the consideration that the corporation receives. But there is an exception for eligible property transferred to the corporation in exchange for shares.
What is the starting point for stated capital?
The starting point in the calculation of stated capital is the amount of consideration that the corporation has received in money on the issuance of its shares. In addition to money consideration, a corporation can also issue shares in consideration for property (other than a document evidencing the indebtedness of a subscriber or any other person ...
Can a corporation issue shares for past services?
Where shares are issued for property or past services, the corporation may issue the shares for not more than the fair equivalent in money, as determined by the directors, for the property or past services that the corporation has received. For eligible property or services, the amount added to the stated capital account ...
Do all shares in a series have the same stated capital?
Therefore, all shares in the class or series have the same per share stated capital amount. Stated capital can be increased or decreased by various transactions in which the corporation redeems or purchases its own shares.
What are the major changes in the capital base?
The major changes in the capital base are that deferred federal income taxes are no longer specifically excluded from taxation, and only taxpayers whose combined stated capitaland surplus is less than $1 million may make the election to use Federal income tax accounting methods in determining surplus (Section 171.109(c)).
How is franchise tax determined in Texas?
Under the new law, the franchise tax is determined by calculating two bases: net taxable capital ( stated capital and surplus reduced by certain deductions) and net taxable earned surplus (net income) (Sections 171.001 and 171.0011 of the Texas Tax Code). The major changes in the capital base are that deferred federal income taxes are no longer ...
What is legal capital?
The par valueof all of a company's shares outstanding. Legal capital may not be distributed as dividends, or as anything else. It is also called stated capital.
Is legal capital distributed as dividends?
Legal capital may not be distributed as dividends, or as anything else. It is also called stated capital. Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved.
Who published Wall Street Words?
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
Explanation
Example
- ABC Inc issues 1,00,000 common stock shares at $10 par value, the total value of common stockissued at par equals $10,00,000. In this case, if there is any additional amount that ABC Inc receives on issuing the stock, the additional amount will be recorded as additional paid-in capitalAdditional Paid-in CapitalAdditional paid-in capital or capital surplus is the company's exc…
How to Calculate Legal Capital?
- You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked For eg: Source: Legal Capital(wallstreetmojo.com) The value of the legal capital of the Firm is the cumulative amount of the par value of all of its stocks. Hence, if a firm has a par value of $10 with 10,000 shares outst…
Importance
- This concept was first implemented to protect the Firm’s creditors in default or any financial crisisFinancial CrisisThe term "financial crisis" refers to a situation in which the market's key fina...
- The concept of this capital can only be applied to issued stocks. It cannot be applied for such stocks that have been approved already for issuance but are yet to be issued.
- This concept was first implemented to protect the Firm’s creditors in default or any financial crisisFinancial CrisisThe term "financial crisis" refers to a situation in which the market's key fina...
- The concept of this capital can only be applied to issued stocks. It cannot be applied for such stocks that have been approved already for issuance but are yet to be issued.
- The value of assets of a firm should always exceed the sum of the value of liabilities it has and the amount of legal capital.i.e., Assets >= Liabilities + Legal Capital
- The par value of issuing security depicts some of the full parts of this capital.
Advantages
- This concept protects in case of any financial crisis.
- It cannot be distributed to the Firm’s shareholders by any means.
- A firm does not need to pay dividends to the shareholders if doing so would damage its Legal Capital.
- A firm does not need to acquire capital shares if such activity could weaken this capital.
Conclusion
- Legal capital is an amount of a firm’s equity that is not allowed to leave the business and cannot be distributed to shareholders in the form of dividends or as anything else. It is referred to as the par value of the Firm’s common or preferred stock issued to the investors. This capital concept only applies to stocks that have been issued. It cannot be applied to any stock approved for issu…
Recommended Articles
- This has been a guide to what legal capital is and its definition. Here we discuss how to calculate legal capital along with an example, importance, and differences. You may learn more from the following recommended accounting articles – 1. Partnership Capital Account 2. Share Capital 3. Majority Shareholder 4. Equity Formula 5. Contributed Capital