The Difference Between Shares and Dividends

AMS Accountancy Ltd's, Peter Bromiley, defines the difference between shares and dividends.

I am asked this quite often! The vast majority of limited companies are ‘limited’ by shares. This means that ownership of the company is represented by the number of shares held by shareholders.

So, if there are 100 shares issued by a company, and you own 20 shares, then you own 20% of the company.

There are different types of rights held by different types of share, but typically, an Ordinary Share gives its holder a vote in shareholder meetings (one share=one vote), a share of the value of the company when it is sold or wound up and a share in the profits made by the company.

Profits are paid out to shareholders (when/if proposed by the directors) in the form of dividends. For each class of share (there may be many), dividends are paid out in proportion to the shares held.

So, if a Company’s director decides to pay out some profit to its shareholders, then, in theory, the director proposes a dividend, drafts a Minute, pays out the dividend of (say) £100 per share to the shareholders, and issues a dividend voucher to accompany each dividend. So long as the directors are satisfied that there are ‘distributable' profits a Company can pay out dividends whenever it wants.

For many small Companies, an accountant is usually consulted regarding the most tax efficient split of shares between directors and their partners / spouses to make full use of each shareholder’s personal allowance and basic rate tax bands – to ensure the minimum amount of tax is paid.