What Happens To Company Profits?
Your company’s articles of association will set out how your company profits are distributed.
Companies that are set up limited by shares are set up as profit making businesses. This means that any surplus income is normally distributed among shareholders in the form of dividends.
Companies that are set up limited by guarantee are usually set up as non-profit businesses. This means that any surplus income is generally used to promote and achieve the aims of the non-profit.
There are other reasons a company can use their trading profits, such as:
- Growing the business
- Purchasing new equipment or premises
- Funding new projects
- Investing in other businesses
- Implementing marketing strategies
- Paying for promotional materials
Allocating company profits
Company profit allocation is decided by the initial shareholders or guarantors during the incorporation process. These rules are then outlined in the articles of association.
Income is generally allocated according to running costs, expenses, salaries and wages, national insurance, and all other costs and liabilities. Only after these have been paid can dividend payments be issued to shareholders.
Value of shares
The number, class and value of shareholdings determine the percentage of profits that a shareholder is entitled to have. Each share represents a percentage of the business and therefore a percentage of profit entitlement.
Shareholders can choose to leave some, or all, of the available profit in the company to further the business. Alternatively, they can take their portion of the company profit as dividend income.
There is no limit on the number of shareholders a company can have, or the number of shares it can issue. But the value of the shares will be diluted if the number of shares issued increases.
Overall, this will affect the shareholder’s ownership, profit entitlement, control, and decision making power. These are important factors to consider when deciding on the number of shares to issue during company formation.
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