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If a company pays a dividend to shareholders that is to say not pro rata, is it still a dividend for permissible purposes?
3Apr2008 Filed under: CorporationsA company have 2 shareholders, one owning 75% of the shares and the other 25%. If the company declare a bread "dividend" and pays 2/3 to the 75% shareholder and 1/3 to the 25% shareholder (Both consent to this movement.), is it
1) a dividend for both shareholders; or
2. a dividend for the 75% shareholder and a dividend to the extent that it is pro rata for the 25% shareholder, or
3) not a dividend at adjectives?
If it is not a dividend, what is it?
Answers:
A distribution of profits by a corporation to its shareholders is a dividend. Normally, the dividend is pro rata, and it is not clear why the two shareholders would me an unequal distribution. However, if it is a lawful dividend distribution, the corporation should article for it by reducing retained income and respectively shareholder should report the amount received as dividend income.
There may be reason for making an unequal distribution. For example, portion of the return may be compensation for services, or repayment of a loan, surrounded by which luggage adjectives of the distribution is not a dividend. It is even possible that the 75% shareholder borrowed money from the 25% owner and the dividend distribution is a means of access of repaying the loan. You would hold to look to the reason for the unequal distribution to detemrine how the corporation should narrative for it and how the shareholders should vindication for their segment.
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