A dividend is a payment made by a company to shareholders as a return on their investment. A dividend can only be declared to shareholders if that company has made a profit after payment of corporation tax.
Who can receive a dividend?
In a small or medium sized business it is very likely that directors and shareholders are the same. In a larger business, it is more likely that there will be many shareholders, who are purely investors and do not take any executive role in the company.
When are dividends paid?
There is no particular period or number of times in the year set out under company law when a dividend should or shouldn’t be paid. However, dividends can only be paid when a company has made a profit. Larger companies tend to pay dividends to shareholders once or twice a year, but if a company is in profit it can announce a dividend at any time. Shareholders are paid dividends proportionate to their investment/shareholding in the business.
A dividend will be paid after corporation tax has been calculated, and cannot be classed as a business cost for tax purposes.
How are dividends issued?
A company, via its directors, must check that the balance sheet is healthy and that there is a profit in order to announce a dividend.
The directors will then call a board meeting to declare a dividend. The declaration of dividends agreed in the meeting must be recorded in the minutes of the meeting for the purposes of the company books and records. Details of the current financial position, and the level of dividends declared should be recorded.
What are the benefits of paying dividends, versus salary?
In a small company where the directors and shareholders are the same it is usual for the directors to take tax advice on how best to be remunerated by the company. An accountant might suggest that the directors take advantage of the threshold limits for paying tax on salaries (PAYE and NIC) and the tax allowance on dividends, so that amounts paid to directors are paid via a mix of salary and dividends in order to fully maximise tax allowances.
Non declaration of dividends
There is no legal obligation on a company to declare dividends. Even if there are available profits for distribution, the directors may decide not to declare a dividend if this is not in the best interests of the company.
- this might be the case if the company needs to use the profits to fund more investment into the company, to ensure its success.
- as long as this does not breach their director’s duties, then this is a decision the directors are entitled to reach on behalf of the company.
Breach of duty and unfair prejudice claims – wrongful non payment of dividends
However, if the decision is taken in breach of duty, for an improper reason, then a shareholder might have recourse by bringing a claim that the failure to declare dividends is unfairly prejudicial to the shareholders.
Shareholders would have to be very clear that the decision-making behind the failure to declare a dividend is unfairly prejudicial and out of in line with the duties that the director has to the company.
At Francis Wilks & Jones we are privileged to work with some excellent external professional advisers, including accountants, and can put you in touch with an accountant appropriate to you if you require. Contact us for more details. In addition, if you have questions on the dividend and salary position of your business, or have concerns as a shareholder or director, one of our team of company law experts will be happy to talk through the issues with you.
Supportive and friendly with partner-led involvement, I would recommend Francis Wilks & Jones to anyone facing a similar situation.A shareholder who turned to us after discovering that his co-shareholder was profiting well from their business while he was being paid a pittance. We helped him find a way out of the business by selling his shares