MyCIMA

When can a private limited company issue a dividend?

Replies : 5

Question asked by:

Alexa Michael - view profile

We have received the following query from one of our members.  Can anyone offer any help?

"When can a private limited company pay dividends? What are the rules and requirements that must be complied with?"

When can a private limited company pay a dividend?

Dividends are payments made to company shareholders from the profits of the company. If the company has not made a profit over a given period then it cannot pay a dividend. Most large public limited companies pay a dividend either once or twice a year.

A dividend is a reward to shareholders for investing in their company. It is up to the directors of the company to decide if and when a dividend can be paid to the company’s shareholders.

More about the process of paying dividends and the tax implications can be found on the following websites: 

Company Law Club - What is a dividend?http://www.companylawclub.co.uk/topics/faq042.htm 

Business Link - Paying dividends and paying tax http://www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId=1074433390

I hope this is helpful.

Alexa Michael, CIMA

Profit = Dividend

Quote: If the company has not made a profit over a given period then it cannot pay a dividend. If the company failed to make a profit in a period could they payout a dividend from retained profits?

Profit = Dividend

NumberWang,

I believe this is prohibited by the CA.  Why would they want to do it anyway? It would reduce their cash reserves and their equity base, limiting their chances for expansion and investment. It may also reduce any cash 'cushion' they may keep, creating - or making greater - a risk of cashflow difficulties, especially if they are struggling to turn a profit.

Also, I imagine their share price would take a hit as investors would see such a payout as irresponsible and hence would choose to divest?

Just a few thoughts...

Regards

Jeremy

Dividend = profit

My initial thought was that it was/is illegal for a company to pay out more than its retained earnings.

Numberwang is right

Share price doesn't come into is as its a private company. A company can make a dividend payments as long as it has retained earnings (not necessarily current years profits). They may want to pay a dividend to a foreign parent company for tax reasons for example to avoid an interest charge on an inter company loan given for cash flow purposes.