One of the most exciting aspects of having a stake in an ownership is receiving dividends, or payments. Dividends, however, are not merely available just because the corporation has money in the bank. In fact, many corporations prematurely pay out dividends just because it is compelled to show its shareholders it is profitable. This is a big mistake, as it is illegal for a corporation to pay out dividends when it is not allowed to. In turn, directors can be held liable and may even be required to pay back the dividends if a court retroactively believes that the corporation should not have paid out dividends. It is therefore important to understand when dividends are allowed in a corporation.
Generally, courts do not compel distribution absent an abuse of discretion. However, courts also do not give free reign to corporations in Florida to order distributions. In Florida, there are two tests which corporations must satisfy in order to make legal distributions to its constituents: the insolvency test and the balance sheet test.
The first test for distributions is the insolvency test. A corporation will be allowed to make distributions only if it will be able to pay its debts as they become due. In determining if a corporation meets this test, a court looks at the recurring debts that a corporation must pay. The list of recurring debts will vary with the nature of the corporation. If a corporation attempts to make distributions while being uncertain as to whether or not it can meet its usual debts, a court may find that such a distribution is illegal.
The second test for distributions is the balance sheet test. Under the balance sheet test, a corporation’s assets must be equal to or greater than total liability and dissolution preferences. Again, if a court retroactively determines that a corporation ordered dividends be distributed when its assets would not equal total liability and dissolution preferences, it may find that the distribution was illegal.
Corporations are not free to distribute dividends whenever they please. They must meet two important tests before doing so: the insolvency test and the balance sheet test. If a corporation makes a distribution while failing either of these tests, a court may order that the directors who ordered the distribution be held liable for its ramifications and reimburse the corporation. Liability for an illegal distribution can be a costly issue. Call the Trembly Law Firm at (305) 614-3219 to schedule a consultation and see if distributions for your corporation are permissible.
Follow Us on Social Media