Drawing down dividends in first year of trading

[peggyprice]

Hi all,

I understand about the principles of drawing a minimum salary as a limited company director and then taking the rest of my income from the business as dividends - but am I able to take any dividend in the first year of trading, ie before the profits have been declared, or do I have to wait until the accounts have been finalised (which could be anything up to 18 months after the start of trading)?

Any (accurate!) advice gratefully received ...

 

[kevin.doran]

You can take dividends the minute profits (reserves technically) are available and you've undertaken the relevant procedures.

If you really wanted you could take your first one at the end of your first day of trading then daily there after.

 

[john1989]

If you are not producing management accounts or other relevant information, how can you be certain there are sufficient reserves to pay a dividend?

As it is your first year of trading, you run a greater risk of making an illegal dividend (that's a whole other debate!) without ensuring that there are adequate reserves.

You also need to ensure that any dividend declared is done so properly, I.e. Dividend vouchers, board minutes etc.

 

[peggyprice]

If you are not producing management accounts or other relevant information, how can you be certain there are sufficient reserves to pay a dividend?

As it is your first year of trading, you run a greater risk of making an illegal dividend (that's a whole other debate!) without ensuring that there are adequate reserves.

That's the bit I'm trying to understand - how do you manage this process if you need the dividend to maintain your personal income, before you know for certain (or can forecast with some certainty) what the profit will be ... ? Seems to be the downside of going limited vs being a sole trader.

 

[Scalloway]

As One Call Accountants said you should produce management accounts. Any accounting system if kept up to date will be able to do this. Then you need to factor in any costs that may only be paid annually and make a 20% deduction for Corporation Tax.

 

[peggyprice]

So if my management accounts show (after any predicted outgoings) that I'm in profit that month I can draw down that profit? But what if the following month the profit is wiped out by a loss? (Sorry if I'm being thick - just need to understand, before I take on a new business venture, how I smooth out my personal income/cashflow in the first year without hitting a big problem further down the line!)

 

[Scalloway]

That is a chance you have to take. It only really matters at the end of the financial year when you get the final position.

 

[KM-Tiger]

Do you have a directors loan account? If there is insufficient profit, then the cash withdrawn could be shown as a repayment of the loan.

 

[Pish_Pash]

I started trading in Feb 2013....for 8 months, I kept all my expenditure on a spreadsheet (& didn't even total up all my sales formally), then I crossed the VAt threshold & it all went chaotic...then I got some accounts software....backfilled all my data (it took me yonks)...then all this dividend melarkey became a lot clearer.....in short, before you get yourself into a mess like I did, get yourself some accounts software early on, keep it up to date (in pseudo real time if possible...i.e. daily entries of all sales & expenditure) & just look at your running profit & loss report to see what's up for grabs from a divi perspective- job done.

 

[kevin.doran]

...then I got some accounts software....backfilled all my data (it took me yonks)...then all this dividend melarkey became a lot clearer.....in short, before you get yourself into a mess like I did, get yourself some accounts software early on, keep it up to date....

God I wish I could bottle that post!!!