Corporations and Dividend Distribution
One of the disadvantages to incorporating a business is the obligation to adhere to laws governing dividend distribution. Dividends are the profits made from stock that are given to shareholders as a reward for their investment.
Unlike an investor in a limited partnership, an investor in a corporation can only receive a percentage of the profits equal to the percentage that he or she invested in stock. Therefore dividend distribution rules can be a shortcoming for those who choose to incorporate their business.
Profit Sharing
Strictly speaking, a corporation divides its profits based on shares of stock. For example, if a shareholder invests in a corporation and owns five percent of its stock, he or she may only receive five percent of its profits.
In contrast, a limited partnership has more freedom with profit sharing and may give an investor a greater share than he or she originally invested, with the permission of the other partners. This means that the original owners of the company may not be able to benefit from profits in a corporation as much as they would in a limited partnership.
Distributing Profits through Dividends
Some states have limitations on how much of a corporation's profits can be distributed through dividends. This means that there may be a cap on what percentage of the profits may be divided among shareholders, and the rest must be allocated through the corporation in other ways. Before paying out dividends, a corporation must typically take care of all outstanding payments first. This helps a corporation avoid large amounts of debt that could later harm the business.
Contact Us
To learn more about dividend distribution within corporations and how we can help you incorporate your business, don't hesitate to contact Texas Legal Entities today at 512-472-2431.
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