Profit-sharing is an important part of the business processes. As a company is made up of Shareholders, the profit generated by the business is distributed to them at the given time.
Shareholders are entities that invest their money in a company and hold some of its shares. In simple words, they own a part of the company.
After the profit is generated, the dividends are calculated and reflected by EPS (Earnings per Share). The profits are distributed according to the shares held by the respective shareholders.
How do companies calculate and share profits (concept of dividends)
The calculation and sharing of profits in a company are regulated under the Companies Act of 2013.
The profits shared among the shareholders by the company are known as dividends.
The dividends are shared from the company’s profits, unused money, profits from previous fiscal years, or any other capital which the company has.
There are two types of shareholders in a company, i.e., Preference shareholders and Equity shareholders. Preference shareholders are those who own preference shares.
Equity shareholders own common shares of the company. The dividends are first credited to the preference shareholders. After that, it is distributed to Equity shareholders.
Profit sharing in Private limited companies
Private limited companies have their private holders, and there are less than 50 shareholders in the company.
The shares are not available to the public. With that said, these companies are not listed on the Stock exchanges. Companies have the suffix of ‘Pvt. Ltd.’ after their name, are private limited companies.
The proposal of distributing dividends is first given to the board of directors. After the board of directors reviews the proposal and accepts it, the dividend distribution is declared.
The dividends can be paid through cash, electronic, digital, warrant, or cheque. Dividends should be distributed to the stakeholders within 30 days.
Profit sharing in Public limited companies
Both forex vs stocks tends to move much faster than other public assets. Public limited companies, as evident from the name, are those whose shares are available to the public. They are listed on the stock exchange, and the public can take ownership of it.
In the case of public limited companies, especially the ones listed on the stock exchange, the dividend distribution depends on the board of directors.
The board of directors can decide whether to give dividends or not. Only some companies pay dividends to their shareholders.
The dividends are calculated according to the profits generated and the number of shares issued by the company.
The board of directors decides how much dividend should be given for each share to the stakeholders. This metric is also known as EPS (Earnings per Share).
There are many dividend stocks available on the stock exchanges worldwide. A tax is also deducted from the dividends.
This tax is known as Dividend Deduction Tax (DDT). Some famous companies which pay dividends are Johnson & Johnson, Exxon Mobil, and Coca-Cola.
Different companies have different ways of calculating and distributing income to the shareholders. The way is defined in the bare act.