Distribution of profits to members of a business entity – legal aspects

1. Obligation or Option for a Company to Distribute Profits

According to Article 200, Paragraph 1, Point 6 of the Law, the company’s assembly decides on the distribution of profits and on methods of loss coverage, including setting the date for acquiring the right to share in profits and the payout date for members. The assembly makes these decisions with a two-thirds majority of the total votes of all members. The founding act may specify a different majority, but it cannot be lower than a simple majority of all members who have the right to vote on the issue.

As per Article 270, Paragraph 1 of the Law, upon approval of the financial statements for the business year, the profits are allocated in the following order:

1. To cover losses carried over from previous years;
2. To reserves, if required by a specific law (statutory reserves).

In other words, if the financial report shows a profit but the company has losses from previous years or statutory reserves below the legal minimum, this profit must be allocated to cover those requirements. Therefore, if the company has previous losses, it is not in line with the Law to distribute profits to members or leave them unallocated without covering the losses.

On the other hand, the Law does not explicitly require that unallocated profits from a previous period must be reduced by the current year’s loss. However, it is logical to do so, leading to a practical inconsistency where limited liability companies sometimes have both unallocated profits and losses from previous years simultaneously.

1.1. (Non)Requirement to Make a Profit Distribution Decision Annually

Unlike limited liability companies, joint-stock companies are required to adopt financial statements and make a decision on profit distribution at the regular assembly. However, even though there is an obligation to make a decision on profit distribution, there is no requirement to actually distribute the profit to the members.

2. Right of a Company Member to Profit Payout (Dividend)

A member of a limited liability company has the right to share in the profit based on their shareholding in the company. According to Article 152, Paragraph 1 of the Law, a member has the following rights based on their share:

1. The right to vote in the assembly;
2. The right to participate in the company’s profit;
3. The right to a share in the liquidation proceeds;
4. Other rights stipulated by the Law.

Under Article 152, Paragraph 2, the rights of a member are proportional to their share in the company’s capital, unless otherwise specified in the founding act. If not otherwise arranged, each member has the right to share in the profit proportional to their share in the capital.

It is possible to arrange a different proportion in the founding act. For example, a member holding 20% of the company’s capital may have 50% of the voting rights in the assembly and the right to 80% of the profit.

3. Company’s Obligation Regarding Profit Distribution (Dividends)

The subject of distribution is profit as an accounting category recorded in the company’s books. In practice, there is often a question about what can be distributed. Sometimes, account 340 shows unallocated profit that is not the result of closing the Income Statement with a positive net profit.

Since the Law does not specify what can be distributed apart from profits, and given that profit is an accounting category that can arise from various sources, in our opinion, there are no legal obstacles to distributing all that is recorded in account group 34.

The provisions that apply to joint-stock companies also apply accordingly to limited liability companies. This means that a limited liability company can, at any time, make a Profit Distribution Decision. Two key elements are the amount of profit distributed to the members and the timeframe within which the payment must be made.

According to Article 272 of the Law, dividends may be paid in cash or company shares, in line with the dividend payment decision. However, in limited liability companies, the profit share is typically paid in cash, with an option to offset the dividend obligation with another legal claim.

Under Article 271, Paragraph 1, the decision on dividend distribution must specify the amount of the dividend and the payment deadline, which cannot exceed six months from the decision date. Additionally, a member, as a creditor of a monetary obligation, is entitled to statutory default interest from the due date specified in the decision as the dividend payment day.

4. Right to Interim Profit Distribution (Interim Dividend)

To distribute profit, it is necessary to confirm its existence in the financial report. Besides distributing profit determined in a financial report, the Law allows for interim profit sharing. Practically, this enables a company to pay an interim dividend (profit share) from current profits.

According to Article 273, Paragraph 1, if not otherwise specified by the statute, the company can pay an interim dividend at any time between regular assembly meetings if:

• Business and financial reports clearly show a profit for the period covered by the interim dividend, and available funds are sufficient;
• The interim dividend does not exceed the total profit realized since the end of the previous business year, plus unallocated profits and reserves for these purposes, minus the confirmed losses and reserves required by law or statute.

Interim Dividend Formula: Interim dividend amount ≤ profit from the current period + total unallocated profit + reserves for this purpose – previous losses – statutory and reserve requirements.

Due to the flexible accounting form for determining interim results, it is possible that at the year’s end, the interim dividend may exceed the actual profit.

5. (Non)Possibility of Paying Profit and Interim Profit

For companies without reserves, this means they cannot distribute profit to members (shareholders) if the assets (property, liabilities) are lower—or will become lower after the dividend distribution—than the paid-in registered capital.

If a profit or interim profit distribution is possible under Article 275, Paragraph 1, there is an additional restriction on the amount of such a distribution. According to Article 275, Paragraph 2, total payments to shareholders for the business year cannot exceed the profit at the year-end, plus unallocated profits from previous periods and reserves allocated for shareholder distribution, minus past losses and required statutory reserves.

Moreover, per Article 585, Paragraph 1, Point 5 of the Law, a company that makes payments to members contrary to the restrictions can face a fine of 100,000 to 1,000,000 dinars. Members receiving such payments must return them.

Limited liability companies, therefore, must carefully align their profit distributions with legal restrictions to ensure net assets exceed prescribed limits.