Why Singapore Businesses Can Only Pay Dividends From Profits

When running a Singapore small business, understanding how dividends work is essential. One key rule is that dividends can only be paid out of the company’s distributable profits — meaning you cannot legally pay dividends from capital or losses.

This protects your business’s financial health and ensures compliance with Singapore’s regulations. Corporate secretary services in Singapore play an important role in helping businesses meet these requirements and maintain proper documentation.

1. What Are Dividends and Distributable Profits?

Before looking at the legal side, it helps to understand the terms:

• Dividends are payments made by a company to its shareholders, typically as a share of profits.

• Distributable profits refer to the company’s accumulated realised profits minus any realised losses and after reserving sufficient funds.

• These profits appear as retained earnings on the company’s balance sheet.

In Singapore, dividends must only be paid out of these profits to protect the company’s capital and safeguard creditors and shareholders.

2. Legal Restrictions on Dividend Payments

The Companies Act in Singapore sets clear limits on dividend payments:

• Section 403 prohibits paying dividends unless they come from profits available for distribution.

• Paying dividends without sufficient profits is illegal and can lead to serious consequences for directors, including:
  • Fines up to S$5,000.

  • Imprisonment for up to 12 months.

  • Personal liability to repay any dividends improperly paid.

• Directors have a fiduciary duty to ensure dividends are declared only on sound financial grounds.

Corporate secretary services help companies stay compliant by ensuring proper board resolutions, maintaining dividend registers, and keeping accurate financial records.

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3. Financial and Practical Considerations

It’s not just about having accounting profits — companies must also have enough cash flow to pay dividends. Declaring dividends from unrealised profits or borrowing money to pay dividends can threaten the company’s solvency.

Key points directors and business owners should keep in mind include:

• Confirm dividends are based on realised profits, not just accounting figures.

• Avoid paying dividends if it puts the company at risk of failing to meet its debts.

• Keep thorough documentation such as board minutes and dividend vouchers.

• Corporate secretarial firms can assist with compliance, record-keeping, and timely filings with ACRA.

Summary

In summary, Singapore businesses can only pay dividends from their distributable profits to maintain financial stability and comply with the law. Directors should act prudently and seek professional guidance to meet their fiduciary duties. Corporate secretary services in Singapore are essential for managing compliance, documentation, and reporting related to dividends.

Following these guidelines will help your Singapore small business confidently manage dividend payments while avoiding legal or financial risks.

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