Most owners of limited companies understand that in order to take dividends out of a company there must be enough distributable reserves. How is it then that you can have a situation where you make a decent net profit in the year, but you do not have enough distributable reserves to take a dividend?
The key reason is that the Net Profit of your company is found in the Profit and Loss account which tells a story about only one year in the life of that company. Distributable Reserves however are found on the Balance Sheet, which is a cumulative position of your company telling a story about everything that has happened over the years. In order to take a dividend, you must have enough money when you consider your cumulative performance over the life of the company and not just your performance in one Financial Year.
See below some of the reasons why you could have a healthy Net Profit but insufficient Distributable Reserves to take a dividend:
- Losses have been made in earlier years
- Loans have been received and are spent, but the debt remains outstanding
- Directors Loan account is excessive
- Unpaid tax bills
So, when considering whether you can take dividends, do not just look at Net Profit in isolation. It will be the distributable reserves held in the Balance Sheet which determine dividends payable. It is the results of a company over its lifetime that make up distributable reserves, not just performance in one Financial Year.
