Payments out of equity – when and why?

Equity is not “married” to the company indefinitely; it can be decreased just as it can be increased. Now, to focus on the negative change in equity, decrease can happen in two ways: 

  1. Losses accumulated within retained earnings;
  2. Payments being made out of equity.

Losses being earned and covered by prior period profits are something that’s happening more regularly, however payments out of equity are not so common in everyday business.

Why would you make payments out of equity?

For one you’d pay out dividends, that’s the most common type of payment. The second and not so common is payment out of actual capital and/or share premium. Now you may ask why someone would do that.

The reasons why people pay out capital itself are different, but most common are as follows:

  1. Capital requirements changed for the company – no need for such amounts after a while;
  2. Owners restructure the capital due to whatever reasons they have;
  3. Owners need money.

Obviously there may be other reasons, but those are the ones most common as I have come by equity payments.

Don’t be afraid equity payments, but do consider all regulatory requirements – declarations to statutory bodies, taxes to be paid etc.