Limited companies can use their leftover profits after tax to make dividend payments to their shareholders. These dividend payments can be for different amounts depending on what type of shares the shareholder owns in the business. In this article we explain how dividend payments can be paid out for unequal amounts depending on what each shareholder is entitled to.
Limited companies are owned by their shareholders who, literally, hold a share of the business. Some shareholders might own more shares than others, which means that they own different percentages of the business (in accounting terms you might see this referred to as their share of the company’s equity).
Owning shares usually means the shareholder is entitled to receive dividend payments from the company’s profits based on the percentage of shares they own. Someone who owns 30% of a business’ shares will usually receive 30% of the profits, for example. Working on this basis can help to ensure that shareholders get a proportional amount according to their investment in the business.
This assumes all of the company’s shareholders own the same type of shares, but there might be times when a company wants to pay them in a different way. Creating different classes of shares, sometimes called alphabet shares, allows a company to do this.
The term alphabet shares describes the different classes of shares that can be issued by a limited company. They tend to be labelled in the company’s accounts and articles of association as A shares, B shares, C shares and so on, hence the name alphabet shares!
Creating different share classes means each type can be assigned different rights. These could be voting rights, or the percentage of dividends the shareholder of that particular class of share is entitled to.
For instance, an ‘A share’ shareholder might be paid dividends at a different rate to a ‘B’ shareholder. A ‘C’ shareholder may not have the same voting rights as a ‘B’ shareholder. This means you could have a variety of shareholders with very different dividend pay outs and voting rights.
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What are the benefits of paying different dividends out?
If you’re just dividing by share ownership, the benefit is that it’s a fair and simple way of dividing company profits. But what about alphabet shares?
Using different classes of shares means a limited company can be more flexible in the way it pays out dividends.
It lets the company move beyond a pro rata basis of ownership, and instead pay shareholders based on their involvement or investment in the company.
- You might want to appoint family members as shareholders but not give them voting rights. For instance, if you have children who you would like to receive dividends, but they don’t need to make decisions about the business.
- Or, you might invest in a startup and own the majority of it without being involved in day-to-day operations. In that case, it might be agreed that the other directors will receive a larger share of the profits, whilst you still own most of the company.
Creating alphabet shares can become really useful in this sort of situation, giving you more control over who can influence the business.
What does this mean for tax?
Shareholders who receive dividend payments may need to pay Dividend Tax on this type of income. The amount of income they receive in a tax year, and the amount of dividends they earn, affects how much Dividend Tax they need to pay.
Use our online dividend tax calculator to work out what you’ll have left after tax.
You’ll need to tell Companies House about the shares in your business when you first incorporate the company, or if you allot more shares later on. They’ll also need to know the details of each shareholder and what it is that they hold.
The details of what your shareholders (and different types of shares) are entitled to should be recorded in the company’s Articles of Association. This document is a bit like having written rules which set out how to run the company.
Learn more about how we can help with your limited company. Call the team on 020 3355 4047 and get an instant online quote.
FAQs
There's no limit, and no set amount – you might even pay your shareholders different dividend amounts. Dividends are paid from a company's profits, so payments might fluctuate depending on how much profit is available.
Can you pay different dividends to different shareholders? ›
In order to pay your shareholders unequal dividends, your shareholders will need to hold different classes of shares. The directors will then declare: a certain dividend on one class of share; and. a different dividend (or no dividend at all) on the other class or classes.
Are dividends allocated equally to all shareholders? ›
Profits made by companies limited by shares are often distributed to their members (shareholders) in the form of cash dividend payments. Dividends are issued to all members whose shares provide dividend rights, which most do. Company profits are distributed in proportion to the percentage of shares held by each member.
Can you pay dividends in a partnership? ›
Sole traders, partnerships and LLPs can't pay dividends, because they do not issue shares. Limited companies are only allowed to pay dividends if they have enough profit available to do so - and the dividend payment comes out of profit after Corporation Tax.
Is there a limit on dividend payments? ›
There is no limit as to how often or how much a company can pay in dividends and some directors choose to take a dividend monthly to become more tax efficient.
Can shareholders have unequal distributions? ›
Under federal law, a “disproportionate distribution” is a corporation's distribution of property with respect to certain shares of its stock that differs in timing or amount from distributions with respect to any other shares of its stock.
Are dividends to common and preferred shareholders paid at the same time? ›
Preferred shareholders have priority over a company's income, meaning they are paid dividends before common shareholders.
How do you treat dividends in accounting? ›
Under generally accepted accounting principles (GAAP), dividends are not considered an expense of doing business; instead, they are accounted for as a reduction of equity on the balance sheet and added back to net income to compute earnings per share.
Do ordinary shareholders always share equally with all other shareholders in all dividends? ›
Common shareholders are paid the residual dividend left after paying the preferred dividend. Hence, it is incorrect to say that common shareholders are paid equally with all other shareholders. The statement is false.
How do you distribute dividends to shareholders? ›
Cash dividends are paid out either as a check sent to the investor or as a credit to a brokerage account, which can then be reinvested. Stock dividends are paid in fractional shares. If a company issues a stock dividend of 5%, shareholders will receive 0.05 shares in dividends for every share they already own.
In particular, in a partnership business, all partners share liabilities and profits equally, while in others, partners may have limited liability. There also is the so-called "silent partner," in which one party is not involved in the day-to-day operations of the business.
Can a partnership distribute dividends? ›
Corporations pay most dividends in cash. However, they may also pay them as stock of another corporation or as any other property. You also may receive distributions through your interest in a partnership, an estate, a trust, a subchapter S corporation, or from an association that's taxable as a corporation.
Can a limited partnership pay dividends? ›
No. To start, the payments received by MLP investors are often called dividends, but they aren't dividends like investors in stocks or mutual funds receive. Instead, these MLP distributions generally represent only the investor's share of the MLP's net cash flow.
Can you pay different dividends to shareholders? ›
Limited companies can use their leftover profits after tax to make dividend payments to their shareholders. These dividend payments can be for different amounts depending on what type of shares the shareholder owns in the business.
What is the rule for payment of dividend? ›
Key Takeaways. A dividend is a payment of some of a company's earnings to a class of its shareholders. The payment date and amount are determined on a quarterly basis once the board of directors reviews a company's financials. You must buy shares before the ex-date to receive the declared dividend.
What is the rule 3 of payment of dividends? ›
Rule 3 of Dividend Rules prescribes the conditions to be complied with for declaring dividend out of reserves. A pertinent question here is – whether a company can declare dividend out of 100% of the amount that has been transferred to General Reserve.
Can shareholders of the same class be treated differently? ›
In general, a company must treat all shareholders equally; however, if a company has different classes of shares, a company can differentiate between the classes.
Can stockholders pay different prices for the same stock? ›
Depending upon the current market price, stockholders may pay different prices for the same stock.
What is differential dividend? ›
the directors of a public company may pay a Differential Dividend if different dividend rights are provided for in the constitution of, or by a special resolution passed by shareholders of, the company.
