Dividend
Dividend
- A dividend is a special
distribution to shareholders of profits, capital, or other assets of a
corporation. As a general rule, dividends are paid in cash or additional stock
following the end of each fiscal quarter from the profits earned during that
quarter. Traditionally, dividends have accounted for approximately 40% of investors' returns from
stock investments.
Dividends are paid out of the profits that remain after the corporation has paid corporate income taxes on those profits. The dividends paid to each shareholder are taxable income to the shareholder and subject to personal income taxes. In effect, the corporate profit is taxed twice. In 2003, President George W. Bush asked Congress to eliminate what has been called "the unfair double taxation of dividends."
The IRS believes that the shareholder-employees of many small private corporations minimize their own payroll taxes by paying themselves small salaries and making up for it with substantial quarterly or annual bonuses or dividends. You should consult your tax professionals for advice on what is an acceptable minimum salary to a shareholder-employee of a "C" corporation (based on your job and your company's annual revenue); how the IRS is likely to treat your bonuses and dividends;and what is the tax audit effect of the time of the fiscal year when your Board approves bonuses for its shareholder-employees. If you are a shareholder-employee who was paid a fiscal year-end bonus, be aware that the IRS prefers to reclassify that bonus as a dividend. The bonus is a salary expense that is deductible from the corporate income before taxes and not subject to double taxation like a dividend.
The Board of Directors has the authority to issue dividends subject to what is called the "equity insolvency test" and for cash dividends either the highly restrictive "Earned Surplus Test" or the "Surplus Test" or the "Net Assets Test." Directors may not abuse their discretion by declaring a dividend based on a non-corporate motive or personal animosity. The Equity Insolvency Test prohibits the issuance of a dividend if the corporation is insolvent or would become insolvent as a result of distribution of the dividend. The inability of a corporation to pay its debts as they come due is the common test of insolvency.
The Earned Surplus Test for cash dividends prohibits the payment of a cash dividend other than from unrestricted and unreserved earned surplus. On the other hand, the Surplus Test imposes no such restrictions. It allows dividends to be paid on earned surplus, capital surplus, capital reduction surplus, or reappraisal surplus. Under the Net Assets Test the corporation may not distribute cash dividends if after such a distribution, the sum of its total liabilities plus any liquidation priority dividend due to preferred shareholders would exceed its total assets. The last test has been adopted by the Model Business Corporations Act and the Revised Model Business Corporations Act.
Once your Board of Directors has declared a cash dividend, the Board may not rescind it without the consent of the shareholders. Generally, the Board may rescind stock dividends before they have been distributed.
A Stock split is not a dividend. It is merely a division of the outstanding shares of a company's stock. After a stock split, each shareholder's proportionate share of the corporation's equity remains unchanged from what it was prior to the stock split. It is the value of each share of stock that changes; decreasing proportionately after the split.
Disclaimer: The foregoing is intended to provide general information and may not be suitable in specific instances. The glossary information is not intended to be exhaustive, but rather to illustrate typical considerations. The material is provided with the understanding that it is not legal, accounting, tax or any other professional advice.
Copyright © 2003-2007 LawVantage.com, LLC. All rights reserved.
Important LawVantage.com, LLC and its website, CorporateBoardMinutes.com, do not render any legal, accounting or other consulting advice.
For legal advice, you should always consult with a qualified attorney-at-law.
Website development by
Vine Design.
Dividends are paid out of the profits that remain after the corporation has paid corporate income taxes on those profits. The dividends paid to each shareholder are taxable income to the shareholder and subject to personal income taxes. In effect, the corporate profit is taxed twice. In 2003, President George W. Bush asked Congress to eliminate what has been called "the unfair double taxation of dividends."
The IRS believes that the shareholder-employees of many small private corporations minimize their own payroll taxes by paying themselves small salaries and making up for it with substantial quarterly or annual bonuses or dividends. You should consult your tax professionals for advice on what is an acceptable minimum salary to a shareholder-employee of a "C" corporation (based on your job and your company's annual revenue); how the IRS is likely to treat your bonuses and dividends;and what is the tax audit effect of the time of the fiscal year when your Board approves bonuses for its shareholder-employees. If you are a shareholder-employee who was paid a fiscal year-end bonus, be aware that the IRS prefers to reclassify that bonus as a dividend. The bonus is a salary expense that is deductible from the corporate income before taxes and not subject to double taxation like a dividend.
The Board of Directors has the authority to issue dividends subject to what is called the "equity insolvency test" and for cash dividends either the highly restrictive "Earned Surplus Test" or the "Surplus Test" or the "Net Assets Test." Directors may not abuse their discretion by declaring a dividend based on a non-corporate motive or personal animosity. The Equity Insolvency Test prohibits the issuance of a dividend if the corporation is insolvent or would become insolvent as a result of distribution of the dividend. The inability of a corporation to pay its debts as they come due is the common test of insolvency.
The Earned Surplus Test for cash dividends prohibits the payment of a cash dividend other than from unrestricted and unreserved earned surplus. On the other hand, the Surplus Test imposes no such restrictions. It allows dividends to be paid on earned surplus, capital surplus, capital reduction surplus, or reappraisal surplus. Under the Net Assets Test the corporation may not distribute cash dividends if after such a distribution, the sum of its total liabilities plus any liquidation priority dividend due to preferred shareholders would exceed its total assets. The last test has been adopted by the Model Business Corporations Act and the Revised Model Business Corporations Act.
Once your Board of Directors has declared a cash dividend, the Board may not rescind it without the consent of the shareholders. Generally, the Board may rescind stock dividends before they have been distributed.
A Stock split is not a dividend. It is merely a division of the outstanding shares of a company's stock. After a stock split, each shareholder's proportionate share of the corporation's equity remains unchanged from what it was prior to the stock split. It is the value of each share of stock that changes; decreasing proportionately after the split.
Disclaimer: The foregoing is intended to provide general information and may not be suitable in specific instances. The glossary information is not intended to be exhaustive, but rather to illustrate typical considerations. The material is provided with the understanding that it is not legal, accounting, tax or any other professional advice.
Copyright © 2003-2007 LawVantage.com, LLC. All rights reserved.
Important LawVantage.com, LLC and its website, CorporateBoardMinutes.com, do not render any legal, accounting or other consulting advice.
For legal advice, you should always consult with a qualified attorney-at-law.
Website development by
Vine Design.