Shareholders naturally appreciate receiving dividends when corporations can afford to declare them. However, many investors now realize that during periods of tremendous growth, corporations often put most of their profits back into the business. So, instead of declaring dividends, they can expand into new fields and increase profits further, raising the value of each share.
Yet before dividends can be issued, corporations must carefully meet certain state law requirements and properly handle routine administrative procedures.
Here’s a look at some of the state law requirements tied to declaring dividends, along with a brief review of some of the specific administrative tasks involved.
State Law Requirements
Although various states may have slightly different requirements for companies that file their articles of incorporation in them, all of them require each board of directors to pass a formal resolution approving the payment of dividends prior to actually declaring them. Furthermore, state statutes also require corporations to meet certain financial tests before ever voting to declare dividends.
In general, a corporation must have enough assets to either meet or exceed the company’s liabilities by a set ratio – this helps make sure that businesses will still be solvent and able to pay all of their bills after declaring dividends. All corporations must make sure their bylaws carefully reflect their governing states’ requirements in this regard.
Corporations must take state law requirements very seriously because if a board of directors decides to declare a dividend in violation of state law requirements, every individual director may be held personally liable for the dividend declared. This is why it’s so critical for corporations to have their Peachtree City business attorney review their articles of incorporation and bylaws to make sure they’re in full compliance with state laws.
Fortunately, a majority of states will try to find ways to avoid holding directors liable under these types of circumstances – especially when they’ve relied upon certain types of financial statements provided by their corporate officers. However, the threat still exists in some situations.
In order to properly protect themselves, some corporate board members will attach the most recent report from the chief treasurer or accountant to each new resolution passed that declares a dividend.
Common Dates and Decisions Tied to Declaring a Dividend
Declaration date. This is the date the corporation passes its resolution to declare a dividend;
A formal list must be prepared by a set time (the “date of record),” indicating the names of all shareholders entitled to receive a dividend check once a resolution has been passed. In general, dividends are to be paid to all persons who have been issued shares of the corporation. However, when there are two or more classes of stock in a corporation, only those holding a specific class of stock may be paid a dividend under certain circumstances;
The ex-dividend date of a stock. A person must own shares of stock on a specific date (the “date of record” referenced above) to be entitled to receive a dividend check or payment;
Lump sum payment or installments. A decision must be made prior to passing a resolution to declare dividends whether they will be distributed in one lump sum payment to each shareholder or in installments;
Decision to issue stock as the dividend. In some instances, a corporation may choose to issue stock instead of cash dividends to shareholders;
Transferring title to property and not paying cash. In rare cases, it may be most appropriate for a corporation owning extensive property assets to pay dividends only in the form of transferring title to certain property to all of the shareholders;
Payment date set. The corporate resolution to pay dividends must set forth a specific payment date for the dividends.
To obtain help with handling all of your Georgia business planning needs, please contact Shane Smith Law today. You can schedule your free initial consultation with a knowledgeable Peachtree City estate planning attorney by calling: (770) 487-8999.