Everything You Need To Know About Dividends

A dividend is a sum of amount of money to be paid that a corporation to its stockholders from its revenue. All mature and profitable companies and even small businesses pay dividends. If you are a small business owner or in process of starting a business then this blog will serve you with the exact information you need. Keep reading to know everything about dividends.

What Exactly Are Dividends?

The origin of the word “Dividend” is from the Latin word “Dividendum” which means a thing that has to be divided. In terms of accounting a dividend always refers to a “cash dividend. The dividends are profit distributions that a corporation declares to its owners of shares. When the company earns a surplus, it pays a portion of its revenue back to its investors. This is one of the ways to make a profit from investing in the stock.

The board of directors decides when the dividends have to be paid. Although dividends can be paid any time, the board formally approves or declares them but mostly they are paid quarterly. After the distribution of the amount, the remaining profit is reinstated into the company rolling.

Declaration of Dividends:

Declared dividends are not the company’s expense rather it’s the dispensation of the company’s profit. Therefore, the corporation is not allowed to pay dividends from the company’s capital and it can only be paid from the revenue generated monthly or quarterly. This is the reason it is required by the law to show enough credit balance in the retained earnings to fulfill their present and future demands before declaring and approving the dividends.

Distribution of Dividends:

The value of the dividend is a fixed amount per share that the shareholders receive in proportion to their shareholdings.  The distribution of dividends is usually in cash, mostly it is paid into the bank accounts of shareholders. Some companies have dividend reinvestment plans. In this case, the dividend is paid in the shape of more shares that is the issuance of further shares. Another way to distribute dividends is through assets of the company.

Types of Dividends:

The types of dividends that are paid on the company’s common stock are the most common while the other two types occur rarely. So we will discuss the frequently used types which are as follows:

1.   A Special Dividend:

This type of dividend is issued on special occasions and does not recur like a regular dividend. Such as a special dividend is distributed when there are accumulated profits for several years and they will be not required for immediate usage. A special dividend is paid to only the shareholders of the company’s common stock.

2. A Preferred Dividend:

This one is paid to the shareholders of the company’s preferred stocks. The preferred stock is defined as a fixed quarterly payment and acts more like a bond rather than a stock.

What is the Difference Detween Salary and Dividend?

If you run a business then you can set a fixed salary for yourself as well as you can pay yourself dividends. There are more possibilities by combining the two. Let’s dig into the details of the differences between the two.

2. Dividend:

• Dividends are paid from the company’s earning, that too after-tax deduction. As they are not considered as expenses they are not able to reduce corporate’s taxable income.

• The distribution of dividends to stockholders is comparatively easy as it is directly into the shareholder’s accounts from the company’s account in single or multiple transactions.

• For paying dividends to yourself the corporate must prepare and file T5s for you as a shareholder every year.

• Advantages of choosing dividends:

  1. It a convenient way to withdraw money from your own business

  2. Paying dividends is low cost as you do not have to contribute to the CPP that eventually decreases the company and personal expenses. The downside is you will not be eligible for CPP in the future.

  3. It is the simplest way of transferring funds. Suppose you own 100% shares of your company then you only need to declare a dividend and simply withdraw the cash from the corporate account into your account without any juggling with heaps of paperwork and generating payroll.

  4. Paying dividends lowers the chances of payroll penalties, because the continual payrolls may cause errors and delays resulting in firm penalties. Choosing dividends over salary exempts any chances of late or missed payroll remittance.

What are small business dividends?

The foremost question every small business owner has in mind is what is the best way to pay myself as a small business owner?

Mostly the small business owner takes a director’s salary but there is another way to pay yourself, which is via small business dividends. Some certain rules and regulations are necessary to understand the ins and out of paying yourself a dividend.

For a small business and a limited company, paying dividends to yourself is one way to pay yourself from your own business.

How Much Can a Small Business Pay Themselves in Dividends?

As the dividends are mostly distributed through shares so the amount to be paid to all the shareholders is in the proportion of their owned percentage of shares. For instance, if you own the company and hold 50% of the stocks then by-law you receive 50% of every dividend distribution. However, it should be noted that you can only pay a dividend to yourself if the limited company has sufficient retained earnings to meet all the future needs of the company.

In simpler words, there should be enough amount of money in your small business account to maintain the cash flow.  On the other hand, if you attempt to pay yourself more than the present and previous financial year’s profit then the dividends will be considered illegal and you might face stiff revenue and customs penalties.

Consult An Expert:

Even if you are an individual who wants to buy and sell dividends stock on your own, consulting an expert can be beneficial, especially when you are new to this field of business.

For a small business owner, it is pretty much a solo performance where one person has to keep everything in check be it marketing, sales, accounts, or say every aspect of the business. It is very important to keep your financials in order so that your business flourishes smoothly. To stay on top of your business financials as well as keeping your mind free, consider hiring an expert.

 Centrosome Inc. is a bookkeeping firm that offers expert financial advice. We are based in Ottawa, Canada and help small businesses with bookkeeping in Canada and the United States.

To learn more about the services we offer at Centrosome Inc. Please click here, or read what our clients are saying about us, here. If you have any questions about how we can help you, contact us.