Dividends are the payments made to shareholders from a company’s profits. But does everyone get an equal amount? If you’re wondering whether dividends can be paid out in different amounts, the good news is that they can. We’ll explain how it all works.
How do dividends and shares work?
Shares are what show ownership of a limited company. Some shareholders might own more shares than others, which means that they own different percentages of the business.
The percentage of shares owned are used to calculate dividends. Someone who owns 30% of a business’ shares will usually receive 30% of the profits, for example.
This ensures that shareholders are getting a proportional amount according to their investment in the business. But, there are also different classes of shares, called alphabet shares, which can make things a bit more complicated if the company uses them.
The term ‘alphabet shares‘ describes the different classes of shares that can be issued by a limited company. Each class of shares (A shares, B shares, C shares and so on) can be assigned different rights. These could be voting rights, or the percentage of dividends that the shareholder of that particular class of share is entitled to.
For instance, an ‘A share’ shareholder might be paid dividends at a different rate to a ‘B’ shareholder. A ‘C’ shareholder may not have the same voting rights as a ‘B’ shareholder. This means that you could have a variety of shareholders with very different dividend payouts and voting rights.
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What are the benefits of paying different dividends out?
If you’re just dividing by share ownership, the benefit is that it’s a fair and simple way of dividing company profits. But what about alphabet shares?
Using different classes of shares means that a limited company can be more flexible in the way it pays out dividends. It lets the company move beyond a pro rata basis of ownership, and instead pay shareholders based on their involvement or investment in the company.
You might want to appoint family members as shareholders but not give them voting rights. For instance, if you have children that you would like to receive dividends.
Or, you might invest in a startup and own the majority of it without being involved in day-to-day operations. In that case, it might be agreed that the other directors will receive a larger share of the profits, whilst you still own most of the company.
This are a perfect example of where alphabet shares become really useful, and why you might want to pay different rates of dividends. The amount of income a shareholder receives as a dividend also affects the amount of tax they might need to pay. Read our article about dividends and tax.
What should you do if you want to set up different share classes?
Once you’ve set up your shares, you need to let Companies House know as soon as possible. If you make any changes to shareholder structure, remember they also need to be reported. You’ll simply need to supply details of each shareholder, and the shares and equities each holds.
If you need help with dividends and shares, our online accountants can help. Get an instant online quote, or call the team on 020 3355 4047.
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About The Author
Forensics graduate-turned copywriter and blogger. I love turning complex topics into easy to understand, yet engaging pieces of content.