As part of OnlineAdvisor’s efforts to educate, inform and encourage business leaders, we present key financial terms and concepts. One of the areas that business owners like to discuss is the subject of distributions. Distributions deal with income, profits and money in the owners’ or shareholders’ pockets.
Distributions refer to a company’s payment of stock, cash or physical products to its shareholders. For most privately held companies, earnings and other payouts to shareholders are treated as a distribution.
Distributions go out to shareholders as a portion of capital gains and income earned during the fiscal year of the company. In simple terms, the company figures out how much money it made for the year. When the amount is decided, distributions go to shareholders. For this reason, distributions function similar to stock dividends.
For most businesses, shareholders receive distributions shortly after net income is verified for the year.
For example, a company earns $100,000 of net income for the entire fiscal year. The shareholders meet at their annual meeting and decide that they want to take a portion of that net income for themselves, and then leave the rest of the income in the business for growth and safety reasons.
They decide that they will distribute $70,000 of the company’s net income to the shareholders. Based on the number of shares that the shareholders own, they receive a proportion of net income.
It might look something like this:
#1 Shareholder owns 50% of the shares, so she receives $35,000
#2 Shareholder owns 25% of the shares, so he receives $17,500
#3 Shareholder owns 12.5% of the shares, so she receives $8750
#4 Shareholder owns 12.5% of the shares, so he receives $8750
The remaining $30,000 of net profit stays within the company. It moved into the company’s retained earnings.
A company’s shareholders can choose to distribute whatever percentage of net profit, or even a portion of the retained earnings. The percentage amounts of distributions are determined by percentages of ownership the owners hold in the company.