Dividends and profits

Profits represent your net earnings from a business transaction. Dividends are the proportion of profits which you pay to the business owners. Dividends are a compensation for the risk the business owner has undertaken for investing their time and money in a venture. A business owner may also be paid a wage in case they are actively involved in the running of the business.

You can’t earn dividends if you don’t make profits. The directors usually propose a dividend after assessing the profitability and needs of the business. The annual general meeting of the shareholders then confirms the dividend payout.

In a well governed business this is what you would expect. The problem is in these small one man businesses. The business owner might treat the business as a personal ATM where they withdraw money from the business whenever they feel like. It helps to separate business from personal financial affairs.  Mixing the two is often a recipe for disaster. A written dividend policy might help to clarify how a business owner is compensated for their investment.

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