A dividend can be referred to as a sum of money that a business’ shareholders are entitled to for owning a share in the company.

Although there are no regulations pertaining to the frequency of dividend payments, they are often paid out quarterly or every six months. This is a way of giving thanks to a shareholder who has invested his/her money (and trust) in the company’s success.

The Companies House Act of 2006 clearly states that in order to pay dividends to your shareholders, your company must be doing so from its profits. This is to make sure that the business’ wealth is unaffected by the dividend payout.

An illegal dividend payout may arise in one of two ways: failure to declare the dividend and backdating. In this article, we will discuss how you can avoid making these potential costly mistakes.

Failure To Declare

Before paying out each shareholder’s dividend share, the director must first declare the transaction.

A transaction only becomes a dividend when it is formally declared as so. Failure to declare a dividend may result in the company having to take back the money from its investors, which is often a difficult and time-consuming affair.

Backdated Dividends

Backdating is when you take money out of a company but only state the reasons for doing so sometime after the transaction has been completed.

This can be carried out by some companies which may want to hide the true reasons behind the dividend payment, such as to give a boost to a director’s salary (or to get them out of debt). Any act of concealment as to the true intentions of a dividend payout is considered against the law.

How To Avoid Illegal Dividends

Before paying out dividends, you must ensure that you have enough funds to cover all of the transactions. This is known as the company’s sufficient distributable reserves.

This doesn’t simply mean you have enough funds to pay dividends to all of your shareholders. It also requires the business to be able to pay off its present and potential future debts, and still have enough profits to pay dividends. In this way, creditors are not left out of the equation.