The shareholders can withdraw money from the company in two different ways:

  1. As a loan – the party taking the loan must repay it.
  2. As a dividend – the word “dividend” is derived from the Latin word “dividendum”, which means distribution. A dividend is a given sum of money that the shareholders take for themselves from the company’s retained earnings (they are not required to take it). The owners do not have to return a dividend that they have taken. When there are no profits, the owners cannot take a dividend. The shareholders are also entitled to receive a dividend from profits accumulated in previous years. The amount of the dividend that a company distributes does not necessarily reflect its profits at that time.

Example: In 2008, a new company named Lisa’s Bakery earned a $10,000 profit. The owners could have taken a dividend of up to $10,000, but they decided to take only $6,000, leaving the company with $4,000 in retained earnings. The company earned only $10 in 2009, but the owners are entitled to take a dividend of $4,010 ($4,000 from 2008 and $10 from 2009).

Note: The owners can also withdraw money from the company by paying themselves salaries, provided that they are employed as executives, or any other position in the company.

Withdrawal of Money by the Owners