How does Profit-Sharing Work Among Partners in a Pvt Ltd Company?

Shareholders are people who invest in a company. But how do they get their returns? How then are profits of a private Limited Company shared? Let’s find out.

Firstly, Profit-Sharing Work Among Partners in a Pvt Ltd Company is a concept only applicable in Partnership firms. Private limited companies are made up of investments from the shareholders. So, there is no such concept of profit-sharing in private limited companies.

How Does Profit-Sharing Work in a Private Limited Company?

At the end of the financial year, a board meeting is held, wherein, it is decided as to how much dividend should each share receive. Hence, sharing of profit in companies is in the form of dividends decided by the Board of Directors and approved by the shareholders.

What Is a Dividend?

Otherwise called as return or profit, dividends are the distribution of rewards from the company’s earnings. It is paid to the people who hold shares in the company, called the ‘shareholders’.

The dividend depends on the percentage of shares held by each shareholder. Dividends can be final or interim. The final dividend is paid at the end of the year, and the interim dividend is paid during the financial year.

The Companies Act, 2013 governs the process of dividend declaration and distribution amongst private limited companies’ shareholders.

Things to Note Before Distributing Dividends:

1. Dividends are paid only out of profits earned, or out of undistributed profits from the previous years, or out of money provided by the state for this purpose.
2. Before utilizing the profits for distribution as dividends, you need to provide for depreciation.
3. Preference shareholders are the priority to whom profits shall first be distributed. Only after which, the equity shareholders can receive their dividends.
4. From the profits earned,  a company usually sets off the amount required to set off the losses for the current year.
5. The dividend to be distributed to the shareholders is maintained in a separate bank account opened for this purpose.
6. The dividend amount has to be deposited within 5 days of the declaration to the reserved bank account.
7. The company has to distribute dividends within 30 days of declaration to shareholders after company incorporation.
8. If any shareholder’s amounts are due in case of non-payment for some shares, the same can be adjusted while paying dividends.

Modes of Payment:

Dividends can be paid in cash, electronic mode, warrant, or cheque. A cheque or warrant shall be valid only for 3months.

Can the Company Pay if Fewer or No Profits Are Made?

The company may pay to the shareholders despite earning no or fewer profits. But why would a company pay even if it has no profit? It is to maintain their credibility in the regular dividend distribution.

What if the Company Does Not Pay Dividends Within 30 Days of the Declaration of Dividends?

1. If a director knowingly becomes a part of non-payment of dividend, he/she is liable for imprisonment for up to 2years + a fine of a minimum of ₹1000 for each day of default.
2. The company has to pay an interest of 18% per annum during the default period if the private limited company registration had been done in the past.

However, the default on the payment of dividends may not be called an offense in the following cases:

1. The law has barred the company from any such payments due to a lawful operation.
2. If the dividend is adjusted against the dues of the shareholders.
3. If the right to receive dividends is in dispute.

Are Dividends Taxed in India?

Dividend Distribution Tax (DDT) is applicable to the dividends distributed by any domestic private limited company.  If the company fails to pay DDT in full or part within 14days, it shall attract 1% interest every month until the tax is paid.

Conclusion:

Dividends (or profits), when distributed regularly, maintain the credibility, and reputation of the company. Thus, paving the way for genuine investors to buy shares and help in the growth of the organization.