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Corporations • Rights of Shareholders
CORP#056
Legal Definition
Under traditional corporate laws, distributions could only be paid from accounts containing "surplus," such as an account containing retained earnings. Dividends could not be paid out of the stated capital account, which had to contain at least the aggregate par value of all outstanding par value shares. These limitations no longer apply in most states.
Plain English Explanation
Imagine if HypoCorp did so well that by the end of the year, after it had paid all of its expenses (cost of goods, labor, rent, utilities, etc.) it had extra money left over. HypoCorp may choose to spend that money on itself and invest in things it needs (larger office, new equipment, etc.), but what if it chooses to save that money? If it retains those earnings, the money is rolled over into the next accounting period as retained earnings. It's like a savings account for the company. Traditionally (which means, "not applicable in most states today, but you'll still need to know it for exams"), distributions could only be paid out of a corporation's retained earnings.
Another traditional limitation that you'll need to know for exams is that dividends could not be paid out of the stated capital account. What is the stated capital account? Put simply, it accounts for the money that the corporation raised when it originally sold its shares. For example, if a corporation sold 1,000 shares for $1 each, their stated capital account would have $1,000 in it.
Another traditional limitation that you'll need to know for exams is that dividends could not be paid out of the stated capital account. What is the stated capital account? Put simply, it accounts for the money that the corporation raised when it originally sold its shares. For example, if a corporation sold 1,000 shares for $1 each, their stated capital account would have $1,000 in it.
Visual Aids
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