A company is not obliged to distribute all or indeed part of its profits. Instead, the company can retain its profits for future investment in the business. If the company decides to distribute its profits then the most common way is by dividend. These profits are distributed to its shareholders who will normally hold ordinary shares, although, there are other types of shares, eg. preference shares.
We advise our clients to take a final and an interim dividend like most limited companies. This will be typically 2 dividends per year ( 4 dividends at most ). However, if you are a small business rather than a contractor then it is possible to take dividends more regularly.
The directors can only declare a dividend if there are sufficient profits in the business. A director is in breach of his/her statutory requirement to the business if they authorise a dividend where there is insufficient profits.
Dividends can be paid from retained profits and or from profits in the current financial year. Retained profits are the accumulation of previous years profits brought forward.
The payment of a dividend to a director is recognised when the payment is “made available”. For example, if a dividend is recorded in the company accounts in March and the funds transferred to the directors current account then the “made available” date will be March even if the funds are transferred in April.
Dividends should be paid and proposed in direct proportion to the shares held. For example, if a client has 2 shares and his partner 1 share then the dividend paid to him will be twice the dividend to his partner.
If a dividend is paid part way through the year after a further allotment of shares then the dividend payable can be made in line with the new holdings.
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