How profit division is carried out in a limited liability company

Profit division in a limited liability company is the process of determining and distributing business results to capital contributors after the enterprise has fulfilled its tax and financial obligations according to the provisions of law. This division is done based on the capital contribution ratio of each member or according to the agreement stipulated in the company charter. The following article will analyze in detail the process, conditions, and methods of profit division in LLCs.

Conditions for profit division in LLCs with 2 or more members

According to Article 69 of the Law on Enterprise 2020, profit division in a limited company must meet the following three basic conditions:

First, the company has fulfilled its tax and financial obligations according to regulations. Tax obligations include corporate income tax, value added tax, special consumption tax,… Other financial obligations include fees, charges, social insurance, health insurance, due debts,… Fully fulfilling these obligations demonstrates the enterprise’s responsibility to the State and partners, while also creating favorable conditions for production and business activities.

Second, profit used for division is profit after tax. Profit after tax, determined based on audited financial statements, is the basis for profit distribution. Only when business activities are profitable, creating a surplus after fulfilling tax obligations, is the company eligible to distribute profits to members.

Third, the company must ensure the ability to pay debts and other property obligations after distributing profits. Accordingly, after dividing profits, the company must still maintain enough assets to pay due debts and other property obligations. This is to protect the interests of creditors and ensure the company’s stability and reputation in the market.

Fourth, the division must be approved by the Members’ Council.

To illustrate more clearly, suppose Company A has a profit of 1 billion VND, with a debt due of 800 million VND and a tax liability of 100 million VND. In this case, the company is only allowed to divide the remaining 100 million VND after ensuring its ability to pay the above amounts.

Additional conditions under Clause 2, Article 47 of the Law on Enterprises 2020 stipulate that members must fully contribute capital within 90 days from the date of issuance of the Business Registration Certificate to enjoy the corresponding profit distribution rights.

How to divide profits in a limited company

Pursuant to Point l, Clause 2, Article 24 of the Law on Enterprise 2020, there are two main profit distribution methods:

First, division according to agreement in the company charter:

Capital contributing members have the right to freely agree on the method and ratio of profit distribution, including distribution not based on the capital contribution ratio. This agreement needs to be clearly expressed in the company charter or business cooperation contract and approved with the prescribed voting rate.

This form brings flexibility, allowing members to adjust the distribution ratio in accordance with the level of contribution, role and responsibility of each person in the company’s operations.

For example: In a company with 3 members with capital contribution ratio A (50%), B (30%), C (20%), they can agree to share profits according to the ratio A (40%), B ( 35%), C (25%)

Second, divide according to capital contribution ratio:

In cases where the company charter has no provisions or the members have no other agreement, profits will be divided according to the percentage of actual capital contribution of each member according to Point c, Clause 1, Article 49 of the Law on Enterprises 2020. This is a popular plan, ensuring fairness and transparency, consistent with the principle of “contribute more capital, benefit more”.

Formula: Profit received = (Total distributed profit × Capital contribution ratio)

For example: With a profit of 1 billion VND, a member contributing 30% of capital will receive 300 million VND.

Steps for profit division

The process of profit division in a limited liability company is carried out in 3 detailed steps:

Step 1: Prepare financial reports

• Determine actual profit for the fiscal year.
• Calculate taxes payable.
• Evaluate debt repayment ability.
• Prepare detailed reports to submit to the Board of Members.

Note: Annual financial statements, prepared and audited according to regulations, are the basis for determining the company’s after-tax profit. Financial reports must honestly and accurately reflect the company’s financial situation and business results.

Step 2: Organize a meeting of the Board of Members

The Board of Members is the highest decision-making body of the LLC, with the authority to decide on profit distribution plans (Clause 1, Point g, Clause 2, Article 55 of the Law on Enterprises 2020). The meeting must be properly convened, ensuring the participation of all members or authorized representatives. Specifically, the following conditions must be met:

• Send notice of the board of members meeting 3 working days in advance.
• Prepare documents on division plans.
• At the meeting, the Board of Members will discuss and vote on the profit distribution plan. This plan needs to clearly define the distribution ratio for each member, payment method (cash, bank transfer,…), payment time,… To be approved, the plan must achieve at least 65% of the total votes of the members attending the meeting (point a, clause 3, Article 59 of the Law on Enterprises 2020).
• Prepare meeting minutes and resolutions of members’ council meetings.

Step 3: Perform profit division and payment

After the plan is approved, the company will proceed to pay profits to members according to the decided content. Payment must be made in full, on time, and with all valid documents. The payment process is as follows:

• Make a list of members to receive profits.
• Calculate specific amounts for each member.
• Make payment according to the agreed method.
• Store payment documents.

Note:

• The chief accountant is responsible for fully and accurately accounting all economic transactions related to profit distribution.
• The company needs to keep all records related to profit division, including financial statements, minutes of meetings of the Board of Members, profit division decisions, payment documents,… according to regulations. provisions of the law.

Obligations of capital contributing members after profit sharing

When receiving profits from the company, capital contributing members should pay attention to fulfilling the following obligations:

Return of profits (if any): According to Article 70 of the Law on Enterprises 2020, in case the company distributes profits without fully meeting the conditions prescribed in Article 69, members are obliged to refund the amount of profits received by the company. This refund is intended to overcome the consequences of illegal division and protect the interests of the company and creditors.

Declaring and paying personal income tax: The profit that members receive from the LLC is considered income from capital investment, subject to personal income tax (point c, clause 3, Article 2 of the Circular 111/2013/TT-BTC). Members are obliged to declare and pay personal income tax according to the provisions of law.

Compliance with the Company Charter: Members need to comply with the provisions of the Company Charter related to the use of received profits, such as regulations on reinvestment, additional charter capital contributions,…

Consulting service on profit division in limited liability company in Long Phan

With experience and reputation in the field of corporate consulting, Long Phan is proud to be a trusted partner of many businesses in consulting and supporting the implementation of profit division.  Our services include:

• Consulting on developing profit distribution plans.
• Drafting company charter, agreements between members, business cooperation contracts, profit division decisions,…
• Instructions on procedures for meetings of the Board of Members.
• Assist in drafting resolutions and minutes.
• Calculate income tax payable.
• Instructions for declaring and paying taxes.
• Drafting financial reports.
• Consulting on arising tax obligations.
• Consulting on resolving disputes on profit division.
• Consulting on handling violations.
• Representative working with tax authorities.

Profit division in a limited company is a complex issue, requiring strict compliance with regulations and strict procedures. Long Phan with an experienced team will accompany the business, ensuring the rights of capital contributors and the company in profit distribution. Please contact the hotline 0906735386 for detailed advice and dedicated support.