Allocating the profit in general meeting

A company makes a profit of €100,000. It puts €5,000 into the legal reserve, distributes €55,000 as dividends and leaves €40,000 carried forward. Those three amounts are not a free choice: the first is imposed by law, the second is capped, and the third is simply what is left over.

The decision belongs to the shareholders, not the director

Allocating the profit is decided in general meeting, once the accounts have been approved. The director proposes and the body of shareholders decides. A distribution paid out with no resolution is irregular, even where every shareholder agreed in fact and the amount matches the profit exactly.

In a SARL, an EURL or a SA, the accounts are approved within six months of the year end; in a SAS or SASU, the period is freely set by the shareholders. Approval starts the clock for filing at the registry, and it is the late filing that draws an injunction from the president of the commercial court.

The minutes must record the allocation heading by heading, not as a general formula. Writing that the profit is allocated in line with the management's proposal will not do: the accounting entry that follows has to rest on named amounts, failing which it cannot be verified at all.

That requirement also protects the director. A detailed allocation put to a vote closes off the argument about what was decided, years later, when a departing shareholder challenges the distribution policy followed while they held shares in the company.

Three families of reserves

The legal reserve comes first, ahead of any other allocation. Statutory reserves follow where the articles provide for them: they then bind the meeting, which is why they are rarely stipulated, the constraint long outliving the reason that once justified it.

Discretionary reserves come next, by decision of the ordinary meeting where the articles give it that power. They serve to absorb losses, to prepare a capital increase by capitalisation, or to fund the buy-back of shares on the conditions the law lays down.

These three families are not equal when a distribution is contemplated. The legal reserve is unavailable, the statutory reserve requires an amendment to the articles before it can be released, and the discretionary reserve is distributed by a simple resolution. Flexibility is therefore paid for at the outset.

From fifty employees, a special profit-sharing reserve is added to all of this. It is not an allocation of profit in the sense the shareholders decide: it is an employee savings scheme, computed under a statutory formula and carried as a debt owed to the workforce.

• Legal reserve: compulsory, at least 5 %, capped at 10 % of capital, unavailable
• Statutory reserves: imposed by the articles, released only by amending them
• Discretionary reserves: decided by the meeting, distributable by simple resolution
• Carry-forward: a deferred allocation, positive or negative depending on the year

The carry-forward, neither reserve nor oversight

The carry-forward allows the allocation of all or part of the profit to be deferred to a later year. A positive balance is a mark of prudent management: the company keeps a cushion to absorb a future loss without touching its capital or the reserves already built up.

A negative carry-forward tells the opposite story. It holds losses not yet absorbed, and it is set first against the profits of later years, ahead of any transfer to the legal reserve. Paying a dividend while a negative balance remains is a distribution of fictitious dividends.

This is the most useful check before any meeting held to distribute. It fits in one subtraction: profit for the year, less any debit carry-forward, less the transfer to the legal reserve, less statutory reserves. What remains, plus the free reserves, is the maximum that may be distributed.

Exceeding that ceiling is not a mere formal irregularity. It exposes the directors to an action for recovery, and the shareholders to having to return what they received. Setting out the computation before the notice of meeting takes ten minutes; unwinding it afterwards takes a lawyer and two years.