Preferred stock is a class of ownership in a corporation that provides a higher claim on its assets and earnings as compared to common stock. There is no direct tax advantage to the issuing of preferred shares when compared to other forms of financing such as common shares or debt. Still, there are several reasons why a company chooses to offer preferred stock, al🎉l of w🏅hich relate to the financial advantages that it provides.

What Is Preferred Stock?

Preferred stock derives its name from the fact that it carries a higher privilege by almost every measure in relation to a company's 澳洲幸运5开奖号码历史查询:common stock. Preferred stock owners are paid before common stock 澳洲幸运5开奖号码历史查询:shareholders in the event of the company's 澳洲幸运5开奖号码历史查询:liquidation. Preferred stockholders enjoy a fixed dividend that, while not absolutely guaranteed, is nonetheless considered essentially an obl🦄igatio♚n the company must pay.

Preferred stockholders must be paid their due dividends before the company can distribute dividends to common stockholders. Preferred stock is sold at 澳洲幸运5开奖号码历史查询:par value and paid a regular dividend that is a percentage of par. Preferred stockholders do not typically have the 澳洲幸运5开奖号码历史查询:voting rights&n𝓰bsp;that common stockholders do, but they may be granted specialꦬ voting rights.

Why There Is No Direct Tax Advantage

Preferred shares do not actually offer the issuing company a direct tax benefit. The reason for this is that preferred shares, which are a form of equity capital, are owed fixed cash dividends that are paid with after-tax dollars. This is the same case for 澳洲幸运5开奖号码历史查询:common shares. If divid🌌ends are paid out, it is always using after-tax dollars—and thus does not offer a current tax deduction.

Preferred shares are considered to be like debt in that they pay a fixed rate like a bond (a debt investment). It is because 澳洲幸运5开奖号码历史查询:interest expenses on bonds are tax-dedu🍨ctible—while preferred shares pay with after-tax dollars—that preferred shares are considered a more expensive means of financing.

Issuing preferred shares does ha🔯ve its benefits over bonds in that a company can stop ma🐓king payments on preferred shares where they are unable to stop making payments on bonds without going into default.

Why Issuing Preferred Shares Benefits Companies

There are several reasons why issuing preferred shares are a benefit for companies. Preferred stock provides a simpler means of raisinಌg substantial capital than the sale of comꦕmon stock does. The par value that companies offer preferred stock for is often significantly higher than the common stock price.

Companies often offer preferred stock prior to offering common stock, when the company ha🦩s not yet reached a level of success that would make it sufficiently attractive to large numbers of retail investors. The sale of preferre🐻d stock then provides the company with the capital necessary for growth.

Preferred stock also offers companies some financial flexibility. Dividends owed to preferred stockholders can be deferred for a time if the company should experience some unexpected cash flow problems.

The deferred dividends are essentially considered to be owed to the preferred stockholders, payable at some point in the future, but their deferral may be critical in helping a company bridge the gap over a period of financial difficulty. This is one way in which preferred stock is distinguished from bonds since a company not making the interest payment due on a bond would ordinarily be considered to be in default and thus risking 澳洲幸运5开奖号码历史查询:bankruptcy.

One benefit of issuing preferred shares is that for financing purposes they do not reflect added debt on the company's financial books—after all, it's still equity. This actually can save money for the company in the long run. When the company looks for 澳洲幸运5开奖号码历史查询:debt financing in the future, it will receive a lower rate since it will appear the company's 澳洲幸运5开奖号码历史查询:debt load is lower, causing the company to in turn p𓃲ay less on future debt.

Preferred shares also tend not to have 澳洲幸运5开奖号码历史查询:voting rights, so they create another benefit in that issuing preferred shares does not dilute the voting rights of the company's common shares.

The Bottom Line

Preferred stock is a type of stock that allows a company to raise capital without giving away voting rights. Although it does not come with any tax advantages for the issuing company, there are other benefits for the issuing company, including the fact that it does not increase the company's debts.