Have you ever heard the term "dividends" thrown around, maybe in relation to stocks and shareholders, and wondered exactly what it meant? Or whether it could apply to your own small business? Read on for the basic rundown on what dividends are, and when they might come into play in running your business.
Sharing With Your Shareholders
The first thing you need to know about dividends is that they only apply if your company has shareholders. Shareholders (also known as stockholders) are those who legally own a portion (a share) of your company. How these shares are divided up amongst shareholders is something that can be worked out during the process of incorporating your company, and must be agreed upon by the company's board of directors.
Thinking of incorporating your Canadian small business? Read this first.
When a company shares a portion of its profits with its shareholders, the payment of these shared profits is called dividends. A company may choose to distribute dividends on a quarterly (once every 3 months), semi-annual (once every 6 months), or annual (once every 12 months) basis. These dividends may take the form of a cash payment, or extra stock in the company. In the case of extra stock being issued as a dividend, the shareholder can turn around and sell these shares for cash if they wish, or hold onto them if they think the shares will increase in value in the future.
Should You Issue Dividends?
If your business has shareholders, that doesn't automatically mean you will (or should) be issuing dividends. Depending on factors like the size and growth rate of a business, as well as the type of industry, a company may choose to reinvest profits rather than paying out dividends to shareholders. And if a company is not making any profits at a certain point, then they also won't be issuing dividends, as there aren't profits being made to be shared.
Find out when your company will become profitable using break-even analysis.
Typically, start-ups and companies in high-growth areas like certain parts of the technology sector do not issue dividends, and instead reinvest their profits so that they can keep up with the rapid expansion of their business. Industries that do typically issue dividends to shareholders (when the company in question is fairly large and well-established) include oil and gas, pharmaceuticals, and banks.
As always, please keep in mind that this post is not intended as legal advice: if you want to learn more about incorporating your business and issuing dividends to shareholders, it's best to consult with a legal professional.