At first glance, there may not appear to be much of a difference between restricted stock and common stock. When issued to the stockholder, they perform exactly alike, both having voting power and a share in the company as a whole. The difference lies in when the stockholder gains access to the equity.
Common stock gives the shareholder certain rights to the underlying company. It allows the holder to share in profits and vote for the board of directors, in addition to voting on actions a company may want to take. Stocks are also referred to as equities because they represent partial ownership of the company.
Restricted stock is issued to someone when certain conditions are met; he is not an owner of the stock until then. Restrictions may be performance-imposed or time-imposed. Once the restrictions are met, the stock is transferred and treated as common stock.
Corporations use restricted stock for a number of purposes. The most common use is as executive compensation because of the deferral of income-tax consequences. It may also be used as a benefit package to employees, requiring them to be vested before granting the stock.
Restricted stock is given by a corporation, while common stock can be bought and sold at any time. Under Internal Revenue Service guidelines, Special Tax 83(b) election may be made. This makes the recipient of the stock liable for income-tax consequences immediately but establishes a cost basis. If the underlying stock appreciates in value, he can then sell the stock and report capital gains taxes instead of income taxes.
Video of the Day
- Fundamentals of Investments for Financial Planning; Walt J. Woerheide, et al.
- Fundamentals of Income Taxation; James F. Ivers III
- stock image by Michael Shake from Fotolia.com