Dividends are a portion of a company’s profits distributed to its shareholders, typically as cash payments or additional shares of stock.

Primary Implication

Before taking on any investor, knowing how they expect to be paid out on their return on their investment in your business is essential.

Should they expect a dividend payout, you must factor in the anticipated amount in your profit plan as if it were an expense since you shall be paying it out of profits. Failure to generate the investor’s expected return will enter a whole new array of next-to-impossible problems when an angry investor is looking to take over control of your business.

Overview

Dividends represent a share of the after-tax profit of a company, distributed to its shareholders according to the number and class of shares held by them.

The business owner or board of directors decides the amount and timing of the dividend.  They must determine whether it is paid out of current earnings or the past earnings that have been kept on reserve.  Dividend payouts are based on the level of profit earned not out of anticipated but not yet earned profit less any profit reserve set aside for business expansion.  Typically, all dividend payments are taxable, often at the source.

Smaller companies that distribute dividends usually do it at the end of an accounting year, whereas larger, publicly-held companies distribute quarterly dividends.