As a corporation, you have the ability to issue dividends to your shareholders. Dividends are payments made to shareholders as a portion of the company’s profits. They are a way to distribute earnings to shareholders and can be in the form of cash, stocks, or property.
If you are considering issuing dividends for your corporation, it is important to understand the different types of dividends and the process for distributing them. In this article, we will explore the basics of dividends for corporations.
Types of Dividends
There are two main types of dividends: cash dividends and stock dividends.
Cash dividends are payments made to shareholders in the form of cash. The amount of the dividend is typically expressed as a percentage of the company’s earnings per share. For example, if a company declares a $1 per share dividend and a shareholder owns 100 shares, they would receive a $100 cash dividend.
Stock dividends, on the other hand, are payments made to shareholders in the form of additional shares of stock. This means that the shareholder will own more shares of the company, but the value of their investment will not change. For example, if a company declares a 5% stock dividend and a shareholder owns 100 shares, they would receive an additional 5 shares.
Process for Distributing Dividends
The process for distributing dividends can vary depending on the corporation and the type of dividend being issued. However, there are some general steps that most corporations follow:
- Declare the Dividend: The board of directors declares the dividend, which involves determining the amount and type of dividend to be issued.
- Establish Record Date: The record date is the date on which shareholders must be on the company’s books in order to receive the dividend.
- Determine the Payment Date: The payment date is the date on which the dividend will be distributed to shareholders.
- Issue the Dividend: On the payment date, the dividend is issued to shareholders in the form of cash, stocks, or property.
It is important to note that corporations are not required to issue dividends, and the decision to do so is ultimately up to the board of directors.
Tax Implications of Dividends
Dividends are subject to taxation, and the tax rate will depend on the type of dividend and the shareholder’s individual tax situation. In Canada, eligible dividends receive preferential tax treatment, while non-eligible dividends are taxed at a higher rate.
Conclusion
Issuing dividends is one way for corporations to distribute earnings to their shareholders. As a corporation, it is important to understand the different types of dividends, the process for issuing them, and the tax implications associated with them. By staying informed and making well-informed decisions, you can ensure the success and growth of your corporation.