Every effort should be recognised and rewarded. One of the rightful benefits for an entrepreneur is the money they make from their endeavours. This is the point at which understanding dividend distribution is necessary.
Many business owners are unaware of this type of compensation, so in this piece, we will explain what it is, when to calculate it, and other crucial information to help you understand it better. Have fun while reading!
What are dividends?
The parts of a company’s profits that are given to its shareholders as compensation for the capital they invested are known as dividends. Each and every shareholder is entitled to a portion of the company’s profits as dividends.
Law No. 6,404/76’s dividend distribution provisions are highly alluring in comparison to other partner compensation options because they are tax-exempt as long as the legal procedures are followed.
Why and how to distribute dividends?
Opening a company involves not only a purpose, but also a series of dreams and expectations. Among them is having a source of income and making a profit from the activities that will be carried out.
The main ways for entrepreneurs to obtain financial returns during their activities are the pro-labore and the distribution of dividends . While the pro-labore is a form of remuneration that works as a salary for the managing partners, dividends remunerate the capital invested in the business.
What is worth highlighting is that between these two possibilities, the distribution of dividends presents a great advantage: the partner may be exempt from paying Personal Income Tax (IRPF) on the portion of profits he receives, as long as the rules imposed by tax legislation are respected. This same exemption does not apply to pro-labore.
Now that you know this advantage, you may be wondering: what are the rules and how do you distribute dividends? Let’s see:
Who can distribute dividends?
Firstly, for the dividend to be distributed, the company must have a profit to be distributed. If the company is experiencing losses, then the pro-labore will be the most appropriate form of remuneration for its shareholders, because without profits, there is nothing to be distributed.
With the profit recorded in the Income Statement (DRE), partners of small, medium and large companies and even Individual Microentrepreneurs (MEI) must observe a second requirement: the company must not be in debt with Social Security and the Federal Revenue Service.
By meeting these two requirements, it is then possible to share the profits between the partners.
How much of the profit can be distributed?
The value of the dividends to be distributed is defined by the partners themselves.
Individual entrepreneurs can receive all profits obtained during the fiscal year. Companies with two or more partners must perform their calculations based on what is defined in the company’s articles of association or bylaws, observing the proportion of capital invested by each partner.
How to calculate?
The calculation method for distributing profits and dividends is based on the calculation of profits, subtracting taxes and all costs and expenses related to the period from gross revenue. Profits are distributed based on each partner’s share and how much each one owns.
When to pay the distributed dividends?
Dividends are typically distributed at the end of the year, after the financial statements are concluded. However, a resolution approved by the shareholders may allow advances to be granted on a monthly, quarterly, or half-yearly basis.
In this instance, it is crucial to specify in the Articles of Association that the business will produce the revenue statement on a monthly basis or within any shorter time frame than a year.
If the distribution occurs in periods of less than 12 months, it is important to observe the budget forecast for the year. This is because if the company presents a loss at the end of the year, the anticipated dividends no longer meet the requirement that there be profit to be distributed and are taxed with Income Tax as normal.
How important is it to reinvest profits?
Although advantageous from a tax perspective, dividend distribution must undergo another important screening process before being carried out. Partners must assess whether the profits generated could not generate better results if they were reinvested in the business.
The year’s earnings would allow for the improvement of the business through a variety of initiatives, including debt repayment, brand development, product development, recruiting new staff, and a host of other initiatives.
Reinvesting dividends is what enables the business to expand and produce longer-term, more steady earnings. Do not overlook this possibility.
Do not hesitate to consult an accountant with experience in dividend distribution if you still have questions. Use this as an opportunity to bring up this subject in your upcoming chat with your accountant. Additionally, find out if they have previously taken this possibility into account while arranging your taxes.