One distinctive feature of corporations is that they have shares on which they are authorized by law to pay dividends to their shareholders.
Dividends paid to shareholders represents a return on the capital directly or indirectly contributed to the corporation by the shareholders. The payment of dividends is at the discretion of the board of directors.
Some important characteristics of dividends include the following:
1.) Unless a dividend is declared by the board of directors of a corporation, it is not a liability of the corporation. A corporation cannot default on an undeclared dividend. As a consequence, corporations cannot become bankrupt because of non payment of dividends. The amount of dividend and even whether it is paid are decisions based on the business judgement of the board of directors.
2.) The payment of dividends by a corporation is not a business expense . Dividends are not deductible for corporate tax purposes. In short , dividends are paid out of the corporation’s after-tax profits –Ross etal