An S corporation is a company structured under the sub-chapter S tax code of the Internal Revenue Service. This tax election allows the earnings to pass directly to the owners, thereby avoiding corporate income taxation. Subchapter S corporation rules allow for only one class of common stock and preferred stock is not allowed. Furthermore, certain types of debt can be deemed a second class of stock. Other rules governing S corporations state that there must be fewer than 75 outside investors and stock rights must be identical for all shareholders, which also applies to treasury and unissued stock.
Defining Treasury Stock
Treasury stock is stock that has been repurchased by the company from shareholders. Repurchasing stock is a tax-efficient way of returning capital to shareholders. Once the company repurchases stock, it is listed as treasury stock and may either be canceled or reissued at a later date. The balance sheet lists "treasury stock" as shareholder equity, as opposed to a company asset, even though the stock can be used to raise additional capital. Also, treasury stock neither provides the company dividend or voting rights, nor the right to assets in the event of a company bankruptcy liquidation.
Using Treasury Stock
Treasury stock can be a valuable asset in raising additional expansion capital. If the company has fewer than 75 stockholders, the company can offer treasury stock to the new shareholders. However, the new shareholders must have the same stock redemption (sale) rights as the original shareholders. These rights are set forth in the Shareholder's Rights Agreement.
Accounting for the Value of Treasury Stock
There are two methods for calculating treasury stock: the cost method and the par value method. Under the cost method, the stock is assumed to be resold in the future. The stock repurchased is debited to the Treasury stock account, under "Shareholder's Equity" on the balance sheet. When treasury stock is sold it is debited to the cash account as a cost of shares sold and credited to shareholder's equity account. In addition, the capital received from the sale, is not considered income on the income statement. The par valuation method assumes that treasury stock will be retired. The primary difference between the two methods is that par valuation reduces the equity accounts and the cost method reduces stockholder's equity.
S Corporation Treasury Stock
Treasury stock is the difference between the, number of issued shares of stock versus the number of shares outstanding. This is referred to as the "float," which provides investors a percentage value of the shares outstanding versus the percentage of shares controlled by the company. Because the stock of an S corporation is illiquid (not immediately convertible into cash) the attractiveness as an investment is limited. Besides the illiquidity issue, the float is low due to the restrictiveness of the number of shareholders. However, there are new trading platforms that trade non-public companies on a public market platform.
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