It is common practice in owner managed businesses for director shareholders to receive dividends in addition to their salary. However, many directors are unaware that dividends can only be paid if there are sufficient distributable reserves (accumulated after tax retained profits). Dividends paid which exceed such reserves are a breach of the Companies Act and are illegal. Dividends in excess of distributable reserves are then treated as loans repayable to the company. This can become a serious problem if the company enters insolvency arrangements as a liquidator would certainly make an early claim against a shareholder to repay any illegal dividend. You need to review your company finances carefully to ensure that dividends are legal. The preparation and review of regular management accounts will assist the determination of adequate reserves to ensure that directors keep within the law. Always consult us about your dividend policy and seek immediate advice if there is any doubt.
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