A company that has been funded through private equity might pay dividends to its investors. Private equity usually means that an investor or group of investors has purchased shares of ownership in a company whose stock is not listed or traded on a public market or exchange like the NASDAQ or New York Stock Exchange. Privately or closely held companies’ shares are difficult to sell because of the lack of a public market for the shares and a lack of reliable public information about the company.  Therefore, paying dividends on shares of a privately-held company can sometimes make up for the fact that the shares cannot be easily sold. Dividends are shares of profits that are paid to these investors, but a company is usually not required to pay them.

ADVANTAGES OF DIVIDENDS

On the other hand, paying dividends can make your company look better to some investors. The consistent payments your company makes encourages investor confidence and can attract and retain future investors. Certain kinds of investors are looking for regular income, something your dividends will provide. Most startup companies don’t earn enough income to pay dividends in the early stages, and their investors don’t expect them to.

REASONS TO NOT PAY DIVIDENDS

Dividends are taxed as ordinary income, which is a higher rate than capital gains. Therefore, some shareholders might prefer to see profits reinvested in the company so their shares’ value increases. Instead of making payments to stockholders, companies can spend the money acquiring assets, buying back shares, expanding production capacity or any number of other projects. There are investors who look prefer companies that avoid dividends and focus instead on reinvestment.

WEIGHING YOUR OPTIONS

You want to attract the right investors and minimize your and their tax burden. How you accomplish this requires detailed and individualized approach – along with expert advice. This is one reason why there are so many variations in dividend and tax policies among businesses.