What Is Assessable Stock and How Does It Work?

Assessable stock is a type of equity that allows the issuing corporation to require additional capital contributions from its shareholders after their initial purchase. This creates a potential liability for the investor, as the company can demand more funds at a later date. While this form of stock was more prevalent historically, especially for capital-intensive ventures like mining, it is now rare for publicly traded companies. Modern corporate finance has shifted to issuing non-assessable stock, which limits a shareholder’s potential loss to their original investment.

The Shareholder’s Obligation

A corporation’s board of directors may make an “assessment” or a “call” on its assessable shares. This typically occurs when the company is facing operational shortfalls or needs to fund new projects but cannot secure financing through traditional means like loans or issuing new stock. The process is initiated when the board authorizes the call and sends an official notice to all holders of assessable stock, detailing the amount due per share and the payment deadline.

The first option is to pay the demanded amount. By remitting the additional funds to the corporation, the shareholder maintains their ownership stake and all associated rights. This action increases their total investment in the company.

The alternative is to not pay the assessment. Failure to meet the capital call by the specified deadline results in the forfeiture of the shares. In this scenario, the shareholder loses their equity position, and the shares are returned to the corporation’s treasury. The company is then free to cancel or resell these forfeited shares to raise the needed capital.

Identifying Assessable Stock

An investor’s first point of reference to determine if a stock is assessable should be the stock certificate itself, whether in physical or digital form. The certificate may contain language specifying the nature of the shares, including any potential for future assessments.

For a definitive answer, one must consult the corporation’s foundational legal documents. The Articles of Incorporation, sometimes called the corporate charter, will state whether the company is authorized to issue assessable stock. This document governs the corporation’s structure and the rights of its shareholders. For shares acquired through a private placement, the subscription agreement signed by the investor would detail such terms.

Most stock issued today is designated as “fully paid and non-assessable.” This phrasing on a stock certificate or in the corporate charter provides assurance to the shareholder that their liability is limited to their initial investment. The absence of this language, or the presence of clauses granting the company the right to make calls for additional capital, indicates the stock is assessable.

Tax Implications of an Assessment

When a shareholder pays a stock assessment, the payment has tax consequences under Internal Revenue Service (IRS) regulations. The amount paid is not a deductible expense in the year it is paid. A shareholder cannot claim the payment as an investment expense or a loss on their tax return for that period.

Instead, the assessment payment is treated as an additional capital contribution to the company. This contribution increases the shareholder’s “cost basis” in the stock. The cost basis is the total amount of capital an investor has put into an asset and is used to calculate the capital gain or loss upon the sale of that asset.

For example, if an individual initially purchased 100 shares of stock for $5,000 and later paid a $1,000 assessment, their new adjusted cost basis becomes $6,000. When the shareholder eventually sells the stock, this higher basis will reduce the amount of any taxable capital gain or increase the amount of any deductible capital loss.