“You can take a dividend” – That’s great, but what is a dividend?
The business world can be a big scary place, where people use lingo that you may not understand. However, some words and phrases sound far scarier than they actually are. We have noticed that the mention of dividends seems to scare a lot of our clients and having an accountant explain them can often lead to more confusion.
So, we thought we would let you in on the basics!
The definition of a dividend
“A dividend is a sum of money that a limited company pays out to someone who owns shares in the company.”
To be able to take a dividend, you must be a shareholder owning a percentage of the company. You know on Dragons Den when they are haggling over percentages of the company ….. that’s the shares on which a dividend can be paid.
Limited companies can only pay dividends if they have enough accumulated profit, also known as retained earnings, in the business to do so. The dividend payment comes out of profit after corporation tax. Even if the company has enough cash to pay a dividend, it is illegal for the dividend to be paid if there is no available profit.
Dividends should be distributed according to the percentage of company shares owned by each shareholder. So, if you own half the company’s shares, you should receive 50% of each dividend distribution.
How to take a dividend
The profit that the dividend is paid from can be from the most recent accounting period or from a previous accounting period, but the directors must have board meeting to minute they have checked there is enough profit available for distribution before they allow any dividends to be paid. Permitting a dividend to be paid is called ‘declaring’ a dividend.
If you are the only person … you still should have a meeting with yourself to check that there is enough profit in the business to take the dividend. Don’t worry, you don’t need to talk to yourself, just complete the check.
To be able to check if there is enough profit in your business to take a dividend. Your books HAVE to be up to date.
For every dividend payment your company makes you need to issue a dividend voucher to each shareholder that shows the following:
Date the dividend is paid
Company name and number
Name and address of the shareholder
Amount of the dividend and the number of shares held, including the rate and class
The dividend certificate number
The company year end the dividend relates to
Whether it is an interim or final dividend
Signed by an office holder
A copy of the voucher should be given to all recipients of the dividend amount and a copy kept for company records.
How dividends work
Stay with me here, there are some numbers;