Is your Singapore startup making a killing? Here’re some tips on dividends

Kirti Ayush is a chartered accounting with Futurebooks.

So, your upstart company made a profit. You can now decide whether to re-invest the money or distribute it between the company’s shareholders, you, and the other co-founders.

Before you decide, take a look at this brief overview of what dividends are all about. We give important pointers for Singapore startup owners on when and how to pay dividends.

What is a dividend?

Once a company starts making a profit, the portion remaining after taking off taxes can be distributed to the shareholders. The amount eligible to be distributed to the shareholders is usually referred to as a “dividend”. 

When to pay dividends?

It is the directors’ responsibility to see that the company is running smoothly and generating sufficient profits. Here are some important pointers for directors before they can declare dividends to the investors:

Before declaring a dividend:

• Does the company have sufficient profits? The company should have set off the previous year’s losses and tax obligations and have a ‘net profit’ before the dividend amount is recommended.


• Does profit have to be only ‘revenue profit’? No, the balance of the capital profit/retained earnings (previous year’s profits) after setting off losses for the current year (if any) can be considered when declaring the dividend.


• Will declaration and payment of the dividends affect the liquidity of the company? Instead of declaring and paying dividends, using the surplus funds for the growth of business activity of the company may be more viable.


• Obtain the consent of the shareholders so the dividends may be declared.

After declaring a dividend:

• When the decision to declare the dividend has been made, ensure that:
  
  – The company pays the dividend to the shareholder;
  
  – Issue the dividend warrants to each of the shareholders for the dividend amount paid.


• Remember to reflect the dividends declared and paid in your Singapore accounting books.

These few pointers can help directors decide if it is in the best business interest of the company and its investors whether or not to declare any dividends.

How much should dividends be?

Let’s look at an example:

A company was registered in Singapore in Jan 2011. It has two founder investors who have invested 50 percent each in the company’s share capital. Since the business is growing, it has generated profits as of December 31, 2013.

As per the provisions of the Companies Act, only the amount from the net profit/retained earnings are eligible to be considered for declaring any dividends.

The dividends will be distributed usually according to the percentage of the shareholding.

When the company has loss in previous year and profit in current year:

Assuming the company has made a loss of S$10,000 in the previous year (as of December 31, 2012), and profits of S$15,000 in the current year (as of December 31, 2013).

Dividend:

• The amount eligible to be distributed to the investors as a ‘dividend’ will be S$5,000.


• The dividend distributed to the founder investors will be S$2,500 each (being 50 percent of their shareholding in the company).

When the company has profit in previous year and current year:

Assuming the company has made a profit of S$10,000 in the previous year (as of December 31, 2012), and profits of S$15,000 in the current year (as of December 31, 2013).

Dividend:

• The amount eligible to be distributed to the investors as a ‘dividend’ will be S$25,000.


• The dividend distributed to the founder investors will be SG$12,500 each (being 50 percent of their shareholding in the company).

When the company has made losses for previous year and current year:

Assuming the company has made a loss of S$5,000 in the previous year (as of December 31, 2012), and a loss of S$10,000 in the current year (as of December 31, 2013), but has a retained earnings of S$20,000 from previous years; for example, 2011.

Dividend:

• The amount eligible to be distributed to the investors as a ‘dividend’ will be S$5,000.


• The dividend distributed to the founder investors will be S$2,500 each (being 50 percent of their shareholding in the company).

Are dividends taxable in Singapore?

Under Singapore’s one-tier taxation system dividends are not subject to tax in the hands of the receiver. The amount from which dividends are paid has already been subject to corporate tax on profit, and hence is not taxed again.

This amount need not be declared in shareholders’ Singapore personal tax filing.

Futurebooks is Singapore’s most progressive accounting and company incorporation firm. We help entrepreneurs achieve big ambitions. Visit us at our site, as well as our Facebook, Twitter and Google+ pages.

See more: Launching a startup in Singapore? 4 things you need to know

Is your Singapore startup making a killing? Here’re some tips on dividends