Legal capital is the value of a company’s outstanding shares, based on the par value of the share when it is issued. It is an archaic tool in today’s business world, but still important in preferred shares, where dividends are calculated as a percentage of the total par value of the stock.
Legal capital is the value of a company’s outstanding shares of capital. This value is maintained in the company’s accounting ledger and its use for dividends or other distributions is restricted. The amount of legal capital is based on the par value of the share when it is issued on the open stock market. Par value has no relationship to the actual market value of shares or the price changes of shares that are bought and sold between investors. Legal capital and par value are basic elements related to capital investments.
Historically, the stock markets were an unregulated industry and required some basic standards for companies looking to issue shares among individuals and equity investors. The par value of the shares was developed to ensure that investors were not sold company shares at different prices. When an initial public offering (IPO) was announced, companies had to declare the par value of their shares. This par value represented the minimum issue price paid by investors; The companies then recorded the full face value as legal capital in their ledger. This allowed companies to maintain basic book values in unregulated securities markets for common shares.
Common stock tickets were printed and issued with listed par values for investment purposes. Equity investors could reasonably estimate the amount of legal capital a company had on its books by reviewing all entries of issued shares. This information would be compared to the company’s financial statement to determine if there are irregularities in the company’s principal balance.
Legal capital has largely become an archaic stock investment tool in today’s business world. Most common stock today is issued at $.01 par value or no par value at all. Common shares without par value may have a fixed amount of legal capital reserved by the company’s board of directors or other management entity. This capital must remain available after all dividends or distributions to shareholders are made.
Most common stock IPOs do not have dividends associated with stock purchases. Dividends are only paid in preferred shares of stock. The par value of preferred stock is still important in today’s corporate marketplace and must be disclosed by companies issuing preferred stock. Dividends can be calculated as a percentage of the total par value of the stock. The total par value of the preferred shares must be reported as legal capital on the company’s balance sheet. Most companies are required to report preferred shares separately from total common stock capital in financial statements.
Smart Asset.
Protect your devices with Threat Protection by NordVPN
