The key rule in the Companies Act 2006 is that companies may make distributions only out of profits available for the purpose, which are basically determined as accumulated realised profits less accumulated realised losses. It is important to remember that not everything recognised in profits is realised. If the company has a revaluation on an investment property or an intangible asset, it will not be able to pay dividends based on these.
What steps do I need to take when I want the company to pay me a dividend?
You will need to follow the steps:
- Check that the company has adequate distributable reserves to make a dividend payment. You may need to draw up management accounts before making the distribution. Making a dividend distribution from a company that does not have adequate reserves is illegal and the Director(s) may find themselves in breach of their duties and held personally liable.
- Have a meeting of the Directors and produce board minutes and vouchers (this also applies if there is only one Director in the company). Your cloud accounting package may produce these – if not we can provide templates.
- Make the dividend payment from the limited company’s bank account to the shareholders.
At Arcata we specialise in providing accounting and tax services to small businesses. We can advise on when it is possible to pay a dividend from a limited company.