Distribution of dividends between co-founders

Dividends are a part of the company’s net profit that is distributed among its shareholders or co-founders based on their contribution to the company’s authorized capital.

This is a kind of reward for investment, which motivates participants for further cooperation and business development.

The procedure for distributing dividends begins with a decision on their payment. This decision is usually taken at a general meeting of shareholders or founders.

The distribution of dividends is regulated both by national legislation and by the company’s internal documents (statutes, corporate agreement).

The main legal aspects include:

1. Compliance with legal requirements. Payment of dividends is possible only if the company meets the requirements of the law. For example, in many countries, the law prohibits the payment of dividends if it could lead to the financial instability of the company or if the company has outstanding obligations to creditors.
2. Compliance with statutory norms. The company’s articles of association may provide for additional conditions or restrictions on the payment of dividends. These can be, for example, requirements for the formation of reserve capital before the distribution of profits.
3. Proportionality of payments. Dividends must be distributed in proportion to the shares of the participants in the authorized capital, unless otherwise stipulated by the contract. This ensures a fair distribution of profits.
4. Dividends are subject to taxation in accordance with the tax laws of the country where the company is registered. Co-founders should take this aspect into account when receiving dividends.

The distribution of dividends may have its own characteristics, depending on the organizational and legal form of the company:

• Joint-stock companies (AT). In such companies, dividends are usually distributed according to the class of shares (common and preferred). Preferred shares may have a fixed dividend, while common shares receive residual income.
• Limited liability companies (LLCs). In an LLC, dividends are distributed in proportion to the shares of participants. Participants can agree on other terms of distribution in the charter or corporate agreement.
• In partnerships where profits are distributed among the partners according to their contribution or based on some other agreed mechanism, dividends may not be paid in the traditional sense. However, in the case of profit sharing, such payments may be subject to similar legal rules.

To ensure transparency and fairness in the distribution of dividends, the co-founders of the company should follow several practical recommendations:

• Clearly define the conditions in the charter and corporate agreement — this will avoid misunderstandings and conflicts in the future.
• Regularly analyzing the company’s financial condition — will help determine the optimal amount of dividends and ensure the company’s financial stability.
• Consider tax aspects — co-founders should be aware of the tax consequences of receiving dividends and plan tax payments in advance.
• Keeping a reserve fund — will help provide the company with financial resources in case of crisis situations and avoid the need to refuse to pay dividends.