Dividends and company decision records

A dividend is a distribution to shareholders, not a general label for money taken from the company. It requires available profits for distribution and an appropriate decision process. A healthy bank balance alone does not establish that a dividend can lawfully be paid. ^[1]

Check the financial basis

Use appropriate accounts and up-to-date information to assess distributable profits. Consider losses and distributions already made, and ask the accountant to explain the figures relied on. Cash received for future work or money borrowed from a bank is not automatically distributable profit.

Separate the legal profits test from cash planning. Even where profits are available, directors should consider the company's obligations and ability to meet commitments before approving a payment.

Review the share rights

Check which holders are entitled to the dividend and on what basis. Different classes may have different rights, and the number of shares alone may not establish the correct allocation. Avoid choosing different payments for holders of the same rights without understanding the legal and tax implications.

The articles govern the decision process. The model articles distinguish shareholder declaration and directors' decisions concerning interim dividends, with relevant limits. Read the company's own wording and obtain the required approvals. ^[2]

Document the decision and payment

GOV.UK guidance explains the need for a dividend decision record and a voucher containing the required details. Keep copies for the company and provide the relevant shareholder documentation. The requirement to record the decision remains relevant even where there is only one director. ^[1]

Record the date, amount, recipients and share basis consistently. A voucher should reflect a real, properly authorised distribution rather than being produced retrospectively to justify an unrelated withdrawal.

Dividend checklist

• Confirm the accounts supporting distributable profits.
• Review current cash commitments and financial concerns.
• Check share-class entitlements.
• Follow the articles and obtain the required decision.
• Prepare vouchers and record payment or other valid satisfaction.
• Provide the accountant with the final documents for reporting.

Correct problems with advice

If a payment was made without sufficient profits or the right process, establish the facts promptly. Do not assume that backdating minutes or changing the bank description repairs the issue. The company, directors and recipient may need advice on the consequences and an appropriate correction.

Reconcile profit with the proposed distribution

Ask the accountant to identify the accounts and adjustments supporting the available distributable amount. Cash may include borrowed money, customer deposits or funds needed for liabilities. A positive bank balance therefore answers a different question from whether a dividend is lawful. Directors need both the legal financial basis and an understanding of the company's ability to meet commitments.

Consider developments since the accounts used for the assessment. Material losses, disputed receivables or new liabilities can affect the decision. The board should not rely mechanically on an old profit figure while ignoring a deteriorating trading position. Record the information considered and any advice obtained before approval.

Check entitlement and decision procedure

Review the rights of each share class and the required process under the articles. Distinguish the relevant type of dividend and who has authority to decide it. Where owners expect different payments, confirm that the arrangement is supported by the actual rights and appropriate advice. Personal preferences do not replace the company's constitutional rules.

For an illustrative company, one founder wants a larger payment because they worked more hours. That may be a remuneration question rather than a reason to allocate a dividend differently. The company should assess salary, dividends and loan repayments as distinct categories, with the relevant approvals and tax treatment for each.

Keep the decision, voucher and payment consistent

Record the amount, recipients, date and financial basis, and prepare the required dividend documentation. Match the accounting entries and bank payments to the approved distribution. If payment is made in instalments or a balance is credited rather than immediately paid, obtain advice on the proper record and tax timing instead of assuming every method has the same effect.

Do not generate minutes saying a dividend was approved months earlier when no such decision occurred. If money has already been withdrawn without clear treatment, investigate the facts with the accountant. A correction should accurately describe the position and lawful options rather than create an artificial history.

Reassess before repeating a payment pattern

A monthly withdrawal habit can continue after the supporting profits or circumstances change. Review the basis for each distribution and the company's current commitments. If finances become distressed, obtain timely advice before paying shareholders or connected parties. A past lawful dividend does not authorise later payments automatically.

Read Documenting a director loan where unexplained withdrawals have affected a director's account. Board governance support can help organise board decision records, while the accountant should confirm the financial and tax assessment supporting the proposed distribution.

For example, regular monthly withdrawals by an owner should be reviewed as they occur. Waiting until year end to call the total a dividend can conceal a loan balance and leave the company without evidence that each distribution was properly supported when made.