Affects of declaring dividends and liquidating
The primary difference between C corporations and S corporations is that C corporations are taxed twice on earned income: : once at the corporate level when the income is earned, and again at the shareholder level when the income is distributed.
The board will resolve whether or not there are available profits to enable dividends to be paid to the shareholders.Generally, preference shareholders are often not given voting rights, but have preferential rights in respect of its entitlement to dividends and have priority in being paid first compared to ordinary shareholders.Notwithstanding that the articles of the company may not provide for voting rights for preference shares, preference shareholders have the statutory right to vote in 3 situations: Dividends for ordinary shares are not fixed.By definition, a preference share is a share by whatever name called, which does not entitle the holder to a right to vote or to participate beyond a specific amount in distribution of dividend, redemption or winding up.Preference shares can have both equity and debt characteristics, favoured by investors who have different priorities and interests to safeguard.To the extent that a distribution is made from the corporation’s earnings and profits, it is taxed to the shareholder as a dividend. The portion of the distribution that is not considered a dividend is applied first to reduce the shareholder’s basis in the corporation’s stock. Any remaining portion is treated as gain from the sale or exchange of property (capital gain). Important Note: If a shareholder assumes a liability or takes property subject to a liability, the amount of the distribution is reduced by the amount of the liability. Special rules also apply at the corporate level. Special rules apply to distributions to a shareholder in exchange for the shareholder’s stock (redemptions).Instead of being treated as dividends, redemptions are treated as a sale or exchange of the stock by the shareholder. The distinction can be important when the long-term capital gains rates (which apply to redemptions) are higher than the tax rates on dividends.It is considered to a hybrid of debt and equity depending on its exact terms, and can be issued for short term access to capital from investors.The issuance of RPS must be authorised by the articles of the company and the redemption can be effected only on the terms and in such manner as provided by the articles.A corporation will not recognize any gain or loss on a distribution of cash to its shareholders. But if the corporation distributes appreciated property, the corporation must recognize gain as if the property were sold to the shareholder at fair market value. Important Note: These two rules operate as a loss disallowance system.If the corporation distributes appreciated property, the corporation is taxed on the gain under Code § 311(b).