How do dividends work?

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Good morning

I have just set up a limited by shares company through Companies House, and have received all of my formation documents via email. I’m currently awaiting registration confirmation through HMRC, and so am almost ready to go. The only thing I am still slightly confused about is shareholder relations. I understand that I’m to offer my shareholders dividends, but I’m still a little fuzzy about what they are. How exactly do they work? More importantly, how often do I need to issue these?

Thanks in advance

Answers

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Shareholders are entitled to receive a portion of a company’s profits for each of the shares they own. This money is issued as a dividend payment. You can issue dividends to your shareholders whenever you like and as often as you like, as long as you have available profits in your company bank account after taxes and bills have been paid. Typically, however, dividends are issued monthly, quarterly or bi-annually, depending on the size of the business and the amount of profit it makes.

Most classes of shares have dividend rights attached to them, so do check the prescribed particulars of rights attached to each share class you have issued. If your company has ordinary shares, each shareholder should receive a percentage of the profits in relation to the percentage of ownership represented by their shareholdings - i.e. if you own 25% of the company’s shares, you should receive 25% of the company’s profits.

Dividends must be ‘declared’ by the director(s) at a board meeting. A dividend voucher (a receipt) must be issued with each payment. This voucher should state:

  • Date of payment
  • Company name
  • Name of shareholder being paid a dividend
  • Amount of the dividend
  • Amount of ‘dividend tax credit’

A copy of the dividend voucher should be given to the shareholder. The company should also retain a copy.

a year ago
 

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