A distribution of a portion of a corporation’s profits to its shareholders, typically in cash (or sometimes stock), usually declared by the board of directors, providing owners a return on their investment.
What is a Dividend?
Dividends are a mechanism for transferring earnings from a corporation to its shareholders. When a company has profits and doesn’t reinvest all of them in the business, the board of directors may decide to declare a dividend to reward shareholders. For instance, a company might declare a quarterly dividend of $0.50 per share. If you own 100 shares, you’d receive $50. Dividends are most common among stable, mature companies (think blue-chip stocks like Coca-Cola or Apple, which pay regular dividends). Startups and growth companies usually do not pay dividends, as they reinvest earnings to fuel growth, and many early-stage companies don’t have distributable profits anyway. In fact, many investors (like venture capitalists) prefer the company to use cash for growth rather than dividends, since they expect returns via an eventual sale or IPO, not via periodic dividends.
From a legal standpoint, dividends in a corporation can only be paid from either current profits or accumulated profits (retained earnings), depending on state law tests for solvency and capital. Directors have a fiduciary duty when declaring dividends to not harm the company’s ability to meet its obligations. You generally can’t pay dividends if insolvent or if it would render the company insolvent (creditors come first). That said, within healthy bounds, it’s at the board’s discretion. Some stocks have special rights: for example, preferred shares in startups often accrue dividends at a set rate, but they are typically not paid out in cash routinely – instead, they accumulate and possibly get paid upon liquidation or conversion (these are called cumulative dividends in venture financing, often just a small percentage like 6% that adds to the preference). But those are usually not actually paid yearly – they just adjust the payout in an exit scenario.
For tax purposes, dividends have implications: In the U.S., dividends paid by U.S. C-corporations to shareholders are typically taxable to the recipients. For U.S. individuals, “qualified” dividends are taxed at capital gains rates (lower than ordinary rates). For foreign shareholders, U.S. dividends are subject to withholding tax – often 30% unless reduced by a tax treaty. For example, if your Delaware C-Corp paid you (a foreign owner) a $1,000 dividend, the default is $300 withheld to the IRS, unless your country’s treaty says 15% or some other rate. So foreign founders rarely take dividends; they might prefer to take salary or just re-invest or wait to sell shares. LLCs (if taxed as pass-throughs) don’t have “dividends” per se; they have distributions which are not taxed separately because the members are taxed on the income itself as it’s earned.
Declaring a dividend typically requires a board resolution. The board sets a record date (date which determines who is a shareholder entitled to the dividend) and a payment date. Public companies have a whole process (with ex-dividend dates, etc.). Private companies can do it more simply, but documentation is still good practice. When dividends are paid, the company’s assets (cash typically) reduce, and its retained earnings in equity reduce as well (since you’re distributing profits out). For non-U.S. entrepreneurs running a U.S. corporation, you might never pay dividends while privately held. You might instead pay yourself a salary (which is an expense, lowering profit and thereby lowering corporate tax). Dividends come from after-tax profit in a C-Corp (hence the double taxation: corp pays tax on profit, then shareholders pay tax on dividend). Many small business owners avoid dividends for that tax reason, opting to zero out profits via salaries or bonuses if they’re owner-employees (not necessarily applicable to startups on a growth path, but to owner-operated businesses it is).
However, if your U.S. company is profitable and you as a foreign owner want to extract money, you might face a choice: pay a dividend or get other payments. Dividends will trigger withholding. Sometimes owners instead pay themselves management fees or interest on loans, etc., which have their own tax implications but might avoid dividend withholding (but IRS can scrutinize if those are arms-length). It gets into tax planning territory. But purely from a company law view, dividends are straightforward distributions of profit to owners in proportion to their shares (unless you have different classes with preferences).
To wrap up: Dividends = sharing the wealth of a corporation with its shareholders, usually cash from profits, requiring board approval and mindful of double taxation. It’s a way established companies reward investors, but in early-stage contexts, typically not part of the game plan.
