Timeline for Dividend Payment by Singapore LLC

[Narcisse]

I was hoping if someone could confirm that my understanding of the timeline of declaring and paying final dividends is correct, as I'm a little unsure. I will use a company that uses a calendar year as a financial year to make the example simpler. The main thing I am unsure of is exactly when to record the dividends on the LLC books, but I believe it is in the financial year AFTER the year the profit is earned, at the time when the directors approve the dividend at the AGM?

2019 ( Jan - Dec ) Financial year - the LLC carries out business and has a profit of say $100,000 for the financial year 2019. It can use these profits to pay out dividends.

Jan 2020 - the accountant closes the books and prepares financial statements. Confirms profit of $100,000 for the financial year 2019, which means the company can issue any amount less than this as dividends.

Feb 2020 - Company holds AGM and directors approve a total dividend to be paid of $20,000. It is on this date that we the company should record a debit to retained earnings and credit to dividends payable.

Mar 2020 - Company pays out the dividend and records a debit to dividends payable and a credit to bank account.

In this way, it is the financial statements of 2020 which will reflect the dividend paid, even though the amount of the dividend is paid out of (and limited by) the profit for the financial statement for 2019.

Is that correct?

[Myasis Dragon]

Your timeline and transactions are correct.

[Narcisse]

Your timeline and transactions are correct.

Thank you kindly.

[Myasis Dragon]

Be aware that you can also pay dividends out of prior year retained earnings. The only thing you can't do is pay dividends out of paid up capital. This is to prevent you from selling shares to a bunch of suckers, then using the proceeds to pay dividends to all the rest of the shareholders.

[Narcisse]

Thanks for the reply.

Interesting, so you're saying that you can pay dividends out of retained earnings made in financial years that were long, long ago? I had always thought you could only pay them out of the previous 1 (one) year's profits.

E.g.
Year 1 profit = $50K Retained earnings = $50K
Year 2 profit = ($20K) loss, Retained Earnings = $30K

So you're saying that at the AGM that goes over the year 2 financial statements (which takes place in year 3), you could still pay out dividends (even though the last year took a loss), because retained earnings is overall positive?

[Myasis Dragon]

That is correct. Retained earnings are merely prior year profits, and there are no restrictions on paying out profits as dividends.

In your original example, you are paying out of retained earnings anyway, not profits. Consider:

a) You earn your $100,000 in profit during the year.
b) Now you close the year. Your Dec, 2019 balance sheet net worth section contains
Retained earnings, prior year - (let's say $50,000)
Retained earnings, current year - $100,000 (or net profit, if that's what you want to call it)
Paid up capital - (whatever it was, if any is left)
Total net worth

Now, you prepare your January, 2020 financials. The profits you earned in 2019 were last year's retained earnings. So, your net worth account looks like:
Retained earnings, prior year - $150,000 (all profits from all years).
Paid up capital
Total net worth

The only way you could actually pay out of profits and not retained earnings is to pay a dividend in the year that you earned the money. But even then, GAAP would have you pay out of retained earnings first, and would perhaps require you to close the period on the balance sheet to show retained earnings from which dividends can be paid. For example, a company that pays a quarterly dividend will close books four times a year to create the retained earnings pool from which dividends are paid.

You don't even have to earn a profit to pay a dividend. Let's say you had a bad last quarter with a loss instead of a profit. Your retained earnings are zero because you paid them all out in dividends last quarter. But you don't want to miss a dividend payment and cause your stock price to tank. So, you take out a short term loan and pay dividends from the proceeds. All legal, so long as you don't pay out of paid up capital.

That's probably not applicable to a pte ltd since you're the owner/shareholder as well as the manager/director. But it demonstrates that you can pay for dividends in many ways.

[Narcisse]

Yes, that's not applicable to me, but I do thank you for the example, it helps the understanding.

100% understood now. That's annoying, the company I pay for secretarial services is either not aware of that or there was some terrible misunderstanding on the phone when they explained it to me. Though to be fair, we were talking about an interim dividend, she told me that if we paid an interim dividend and then the fortunes of the company changed and we took a loss for the year (she made no mention of retained earnings or past year's profits), we would need to claw back the dividend from shareholders.

[Myasis Dragon]

That is most certainly not correct on the part of your accountant. The Companies Act says you have to pay out of profits, but this is what retained earnings are... profits. What the Companies Act prohibits is selling shares to the public to pay for dividends, selling treasury stock to pay for dividends, and a few other situations. Bottom line: You can't get money for shares and use it to pay dividends.

https://sso.agc.gov.sg/Act/CoA1967#pr403-

Your accountant is mis-characterizing what the section means about "profits"... nothing in there to construe current year profits only. You can make a profit for 3 years in a row and never pay a dividend. It's all retained earnings. You can make a loss in year 4 and pay out a dividend from your retained earnings.

Think about this: What if your company paid no dividends for 3 years, and made $200,000 profit each year as retained earnings. How else would you get your money back out of the company to shareholders, except through dividend payments from prior year's retained earnings?

In fact, from the Companies Act:

Nothing in subsection (1) or (1A) prohibits —
(a) a distribution of a company’s assets by way of dividends lawfully made;

Those assets would include cash from prior year's profits, the sale of assets like buildings and machinery.

I'd note that this would also cover taking a loan against assets to make a dividend payment in lieu of sufficient cash.

You'll want to look at this for all the gory details about companies. Check out the dividends section.

https://sso.agc.gov.sg/Act/CoA1967

[Narcisse]

That is most certainly not correct on the part of your accountant.

Yep, I agree, you're 100% right and thank you for providing the links to the Companies Act to prove it. I don't know if my accountant is ignorant, or more likely there was a miscommunication over the phone when we discussed it. They have provided decent service in the past, so I will give them the benefit of the doubt. It takes two to miscommunicate and one of the two people involved in the phone conversation was me, so I have to take the blame for that.

Either way, thank you for educating me and I am 100% clear now.