How Does a Company Pay Variable Dividends to its Shareholders?
A company will not be able to pay different percentages of dividends to its shareholders unless clearly specified. Otherwise, the dividend could be illegal, forcing the directors of the company to fulfill their legal obligations. In general, if a company has sufficient reserves, we find that there are two main problems that prevent a company from paying different percentages of dividends to its shareholders.
First, the company must have several classes of shares. The general principle is that all shares are of one class if the rights are equal. Note that the emphasis is on sharing rights rather than what is known as sharing. To remedy this, as a rule, we amend the Company's Articles of Association, with specific reference to the different classes of shares and the rights connected to them. This should be reinforced by the decisions of the directors and shareholders documenting it. The rights to the shares must clearly allow for the payment of different percentages of dividends for each class. The standard is that a proportional dividend must be paid on each share, regardless of the share class, unless otherwise provided in the company's articles of association.
How Do Dividends and Stocks Work?
Shares are shares that represent the ownership of a company. Some shareholders may hold more shares than others, which means they own different percentages of the company. The percentage of shares owned is used to calculate dividends. For example, a person who owns 30% of the shares in a company usually gets 30% of the profits.
This ensures that shareholders receive a proportionate amount commensurate with their investment in the company. But there are also some share classes, known as alphabetic shares, which can be complicated if the company uses them.
What are Alphabet Shares?
The term "alphabetical shares" describes the different types of shares that a limited liability company can issue. Different rights may be assigned to each class of shares (A Shares, B Shares, C Shares, etc.). These may be the voting rights or the percentage of dividends to which the shareholder in the relevant share class is entitled.
For example, a "Share A" shareholder may receive dividends at a different rate than a "B" shareholder. A "C" shareholder may not have the same voting rights as a "B" shareholder. This means that you can have different shareholders with very different dividend payments and voting rights.
What are the Benefits of Paying Various Dividends?
If you simply divide by ownership of the shares, the upside is that it's a fair and easy way to share the company's profits. But what about alphabetic titles?
By using different share classes, a limited liability company can be more flexible in how it pays dividends to its shareholders. It allows the company to go beyond a proportionate ownership base and instead pay shareholders based on their stake or investment in the company.
● You may want to name family members as shareholders, but not give them the right to vote. For example, if you have children you want to receive a dividend.
● Or you can invest in a start-up and make the most of it without getting involved in day-to-day operations. If so, it can be agreed that the other directors will receive a larger share of the profits while you still own the majority of the company.
This is a great example of where alphabetic stocks are very useful and why you might want to pay different dividend percentages. The amount of income a shareholder receives as a dividend also affects the amount of tax she may have to pay. Read our article on dividends to shareholders and taxes.
What Should You Do If You Want to Create Different Share Classes?
After you have created your shares, you must notify Companies House as soon as possible. If you make changes to the shareholder structure, remember that these must also be reported. Easily provide details of stocks and shares owned by any shareholder and shareholder.