Chapter Eleven

Corporate Dividends

Corporate Dividends

DistributionDistribution: : Strictly, refers to payments to shareholders that are not a sharing of profits; loosely, refers to any type of payment to shareholders

DividendDividend: : Strictly, refers to a distribution of a corporation’s profits to its shareholders; loosely, refers to any kind of payment made to shareholders

Restrictions Relating to Dividends Solvency and excess tests Legally available funds Tests for distribution

Balance sheet test Equity insolvency test Modern test

Contractual limitations Preferences Classes of shares

Types of Dividends

Cash dividend: cash distribution made by corporation

Property dividend: distribution of some form of property by a corporation

Share dividend: distribution by a corporation of its own shares

Liquidation dividend: distributions made to shareholders when corporation liquidates (also called dissolution dividends)

Stock Split

A stock split is a division of outstanding shares (also called a share split).

Key Features of Corporate Dividends

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A dividend is a distribution of a corporation’s profits to its shareholders.

Dividends may be in the form of cash, property, or shares of the corporation.

Generally, a corporation must be solvent to distribute a dividend, meaning it is able to pay its debts as they come due.

Most state statutes regulate the funds from which dividends may be paid.

Key Features of Corporate Dividends

Slide 2 of 3

Dividends must be uniform within a class but may vary from class to class.

The decision to declare a dividend is made by the board of directors, who will set a record date for determining shareholders entitled to receive the dividend.

Key Features of Corporate Dividends

Slide 3 of 3

Shareholders who receive cash must pay taxes on the amount received, shareholders who receive property dividends must pay taxes on the fair market value of the property received, and shareholders who receive share dividends pay taxes at the time the share is eventually sold.