A dividend is a distribution of a company's profits to its shareholders. A dividend can only be paid if the company has sufficient retained profits from which to pay the dividend. Before paying a dividend, the directors will need to consider the financial position of the company.
"The starting point will usually be the last set of accounts!"
However, consideration should be given as to whether the financial position has changed since then, and particularly whether it has deteriorated. Where management accounts are used to provide a snapshot of the current position, it will be necessary to make an adjustment for the tax due on the profits.
Alternatively, interim accounts can be prepared, but if a company pays a dividend when it does not have sufficient profits to cover that dividend, the dividend will be illegal (ultra vires).
There are two types of dividend:
Interim dividends are those paid throughout the year. For example, these may be paid quarterly or monthly. Personal and family companies will often pay interim dividends to enable them to extract profits from the company to meet their living expenses.
Final dividends are paid annually after the end of the year.
The process for declaring a dividend will be set out in the company's articles of association. Where the company has adopted the Model Articles, they should follow the procedure for declaring a dividend as set out in Article 30.
A final dividend must be declared by an ordinary resolution. The directors must recommend the amount of the dividend and this must be approved by the shareholders at a general meeting or by written resolution.
A final dividend will normally be approved at the annual general meeting. The dividend declared cannot exceed the amount recommended by the directors. By contrast, the directors can make the decision to pay an interim dividend.
If a meeting has taken place, minutes should be prepared. The minutes should contain:
The name of the company
The date that the dividend was approved
The name of the director(s)
The company's address
The minutes should set out the amount of the dividend (per share), the type of shares in respect of which it is being paid, the date it is being paid and the date on which shareholders need to be registered at Companies House in order to be eligible to receive the dividend. The following wording can be used:
"It was resolved that an interim dividend of [amount per share] per [class and type of share] on [date] to shareholders registered with Companies House on [date]. The directors propose a final dividend on [amount per share] per [class and type of share] for the year to [company's year end] to be paid to shareholders registered at Companies House on [date]."
Shareholders must be given a dividend voucher each time that a dividend is paid to them. The dividend voucher is essentially a receipt.
The dividend voucher should contain the following information:
The name and address of the shareholder receiving the dividend
The company's name, registered office and registration number
The date of issue
The amount of the dividend paid
The signature of the company director(s) or a company officer
And finally, the dividend register should be updated following the payment of any dividend.
Until next time ...
ROGER EDDOWES Business Godparent
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Roger trained at Edward Thomas Peirson & Sons in Market Harborough before working at Hartwell & Co, followed by Chancery, as a partner. He started Essendon Accounts and Tax with Helen Beaumont in 2014 as a general practitioner with a hands-on approach.
Roger loves getting his hands dirty, working with emerging, small-to-medium and family businesses to ensure they receive the best possible accountancy advice. Roger utilises an extensive network of business contacts to leverage the best guidance and practical solutions.
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