Dividends may be immediately paid following corporate approvals.
Delaware corporation:
There are no specific legal requirements to produce or provide to the Directors any specific financial statements. However, the Directors must be satisfied that the Corporation can legally declare the dividend out of the Corporation’s “surplus”, or out of net profits from either the current or preceding fiscal year. Often, a balance sheet (unaudited) prepared as of a recent date may enable the Directors to make this determination; however, it is ultimately the Directors’ responsibility to ensure that they have adequate information to determine that the proposed dividend may legally be paid.
Delaware limited liability company:
There are no specific legal requirements to produce or provide to the Manager(s) / Member(s) any specific financial statements. However, the Manager(s) / Member(s) must be satisfied that the LLC will remain solvent following payment of the distribution, and that the liabilities of the LLC will not exceed the fair market value of the assets of the LLC after giving effect to the distribution. Often, a balance sheet (unaudited) prepared as of a recent date may enable the Manager(s) / Member(s) to make this determination; however, it is ultimately the responsibility of the Manager(s) / Member(s) to ensure that they have adequate information to determine that the distribution may legally be made.
Delaware corporation:
A dividend may be paid out of two legally available sources:
- surplus, which is the excess of the Corporation’s net assets over the Corporation’s stated capital (i.e., the aggregate par value of all issued and outstanding shares of capital stock); or
- if there is no surplus, out of the net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.
Delaware limited liability company:
A limited liability company may make a distribution to its member(s) provided that, at the time of and after giving effect to the proposed distribution, the liabilities of the Company will not exceed the fair value of the assets of the Company.
For purposes of making this determination, liabilities to the member(s) on account of its / their membership interests, and liabilities for which the recourse of creditors is limited to specified property of the Company, shall not be included in the calculation. In this regard, the fair value of property that is subject to a liability for which the recourse of creditors is limited shall be included in the assets of the Company only to the extent that the fair value of such property exceeds the relevant liability.
Delaware corporation:
No. However, the amount of reserves for a Delaware corporation is not generally important for purposes of issuing dividends. If there has been a special purpose reserve set aside as funds not available for dividends, the Directors may abolish this reserve to increase available funds for a dividend.
Delaware limited liability company:
N/A.
Yes, provided that the loan does not cause the entity to violate the applicable dividend / distribution standards set out above. However, if the lender is a related party, the section 385 rules should be considered from a tax perspective.