Common stock is the basic class of equity ownership in a corporation, a claim on the residual that ranks behind every creditor and behind whatever preference the certificate of incorporation or the board’s issuing resolution gives another class. It carries one vote per share unless the certificate of incorporation provides otherwise, and a dividend only if and when the board declares one.
Both rights are statutory defaults rather than fixed features of the share. Delaware counts votes per share and leaves the dividend to the directors, both in stockholder, and the residual is what the accounting definition of equity describes, in owner’s equity.
Common Stock and Preferred Stock
The line between the two classes is drafted, not assumed. A corporation may issue one or more classes of stock, any or all of which may be stock with par value or stock without par value, with such voting powers, full or limited, or no voting powers, and such designations, preferences and other special rights as are stated in the certificate of incorporation or in the resolution or resolutions providing for the issue of such stock adopted by the board of directors (8 Del. C. § 151(a)). A class is not preferred because of its name. It is preferred because one of those two documents gives it a preference.
On dividends that preference is explicit. Holders of preferred or special stock are entitled to dividends at the rates, on the conditions and at the times the certificate of incorporation or the issuing resolution states, payable in preference to, or in such relation to, the dividends payable on any other class, and when dividends upon those stocks have been paid or declared and set apart for payment, to the extent of the preference to which they are entitled, a dividend on the remaining classes may then be paid out of the remaining assets available for dividends (8 Del. C. § 151(c)). Common stock is that remaining class.
On liquidation the statute says less than the usual summary does. Preferred holders are entitled to such rights upon the dissolution of, or upon any distribution of the assets of, the corporation as shall be stated in the certificate of incorporation or in the resolution or resolutions providing for the issue of such stock adopted by the board of directors (8 Del. C. § 151(d)). A liquidation preference is a drafted term rather than a default, so the only way to know what it is worth is to read the certificate of incorporation and any board resolution issuing the class. What is not optional is the creditor ordering above both classes, which stockholder sets out.
The vote is the same kind of term, so a class can hold a dividend preference and no vote at once. Inside an S corporation the vote alone is treated differently, because voting differences among common shares do not create a second class there, set out in c corp vs s corp.
Par Value and Additional Paid-In Capital
The common stock line on a balance sheet is not what the shares sold for and not what they are worth. It is the amount carried as capital for those shares, and for stock with par value that is the aggregate par.
Par value is a floor on consideration rather than a measure of value. Shares with par value may be issued for consideration having a value not less than their par value, as determined in accordance with § 152 of the same title, or by the stockholders if the certificate of incorporation so provides (8 Del. C. § 153(a)). Section 152 leaves that determination with the board of directors, which may delegate it only in a resolution fixing a maximum number of shares, a time period and a minimum consideration (8 Del. C. § 152).
The part of that consideration the board determines to be capital cannot fall below the aggregate par value of the shares, and the excess of net assets over that capital is surplus (8 Del. C. § 154). Shares without par value carry no such floor. They may be issued for the consideration determined the same way (8 Del. C. § 153(b)), and the part of that consideration the board determines to be capital is the stated capital of those shares, which is what the caption carries for a no par class (8 Del. C. § 154).
Say a corporation issues shares on the terms below.
100,000 shares issued, $0.01 par, sold at $5.00 per share
cash received 100,000 x 5.00 = 500,000
common stock, at par 100,000 x 0.01 = 1,000
additional paid-in capital 500,000 - 1,000 = 499,000The caption moves by the par amount alone, and the rest of the cash lands in additional paid-in capital, which Regulation S-X keeps as its own caption under other stockholders’ equity alongside other additional capital, retained earnings and accumulated other comprehensive income (17 CFR 210.5-02).
Where a Firm Meets the Caption
Two documents ask for the common stock caption, and they ask for different things.
Regulation S-X is the more demanding, and it reaches only financial statements filed with the SEC under the federal securities laws (17 CFR 210.1-01). For each class of common shares, caption 29 requires the number of shares issued or outstanding, as appropriate, and the dollar amount thereof on the face of the balance sheet, with the number authorized on the face or in a note (17 CFR 210.5-02). Authorized, issued and outstanding are three different counts, and the rule asks for whichever of issued or outstanding is appropriate rather than for both.
The corporate return keeps the same separation in fewer lines. Under Liabilities and Shareholders’ Equity, capital stock sits on line 22, split between preferred stock and common stock, with additional paid-in capital on line 23 directly beneath it (IRS, Form 1120, Schedule L). The liability lines above it are walked through in liabilities, and a change in the share count alone does not move the equity total, the mechanic behind a stock split.
Common Questions
Equity to the issuer, an asset to the holder, and never both on one balance sheet. The corporation reports the shares it issued under the stockholders’ equity captions. Whoever holds those shares reports an asset, because an asset is a present right of an entity to an economic benefit (FASB Concepts Statement No. 8, Chapter 4, paragraph E16), and a filer that holds them reports under one of two Regulation S-X captions, marketable securities for current marketable equity securities and other investments for non-current ones (17 CFR 210.5-02).
Common stock is one caption. Common equity is the whole residual attributable to the common class, so it also picks up the paid-in capital and retained earnings that Regulation S-X puts under a separate caption for other stockholders’ equity (17 CFR 210.5-02). The two agree only for a company that has raised nothing above par and retained nothing.
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a trial task lets a firm grade a real block of its own equity work before a client balance sheet depends on it.
