Is Your Dividend Payment Illegal?

Is Your Dividend Payment Illegal?

You do your due diligence and invest in a company, you may even be one of the company’s directors, putting in the work on a daily basis to help ensure that the company becomes a successful business venture. 

Congratulations! The company finally turns a profit and you’re ready to reap the rewards in the form of dividend payments. 

But wait, there are some legalities that you may not be aware of – dividend payments aren’t a director’s natural right, even if there’s money in the company’s business account! Dividends can only be drawn under specific circumstances.

So, what are the criteria that enable directors to draw a dividend? The Companies Act 2006 states that, “A company may only make a distribution out of profits available for the purpose”. Or in other words, dividends can only be paid when a company has accumulated realised profits in excess of its accumulated, realised losses.

This means that dividends are illegally drawn from a company in three cases:

1. When dividends are paid in excess of its net profit amount 
2. If dividend payments are made from the company’s capital, or 
3. If dividends are paid when the company’s losses exceed its accumulated profits

Company accounts help business owners to not run afoul of the law by ensuring there is sufficient ‘distributable profits’ to cover any dividend payments. While it is only a statutory requirement that full accounts be prepared to supplement any final dividends that a company intends to make, it is also highly recommended that companies prepare a draft set of basic accounts every time the directors intend to make even an interim dividend.

121 Company Formation is the only company formation agent that also offers full and comprehensive bookkeeping and accounting services for small companies. So, whether you worked with us to register your company, or simply want to have your company accounts professionally prepared and filed, our team of accountants can help!

For more on the topic of dividend payments, see our blog, “Salary or Dividends, Which Is Better?”

 

About 121 Company Formation

121 Company Formation is one of the UK’s leading online company formation agents. We have helped over 50,000 entrepreneurs register a company in the UK. We offer the most comprehensive range of services including company formation packages that start at just £15.95, administrative, accounting, and bookkeeping services to support you and your business before, during, and after the incorporation process.