The year's profit is divided in three directions. One portion goes to you as a dividend, one portion remains as a reserve for hard times, and one portion is reinvested for growth. There is no one-size-fits-all formula, but there is a clear principle. The allocation is decided by plan at the beginning of the year, not in haste when the account looks full.
The dividend is your reward as the owner, separate from the salary you receive for your work. You've earned it and it's right for you to take it. When the dividend is distributed, tax is paid on the amount at a rate of 8%. Just be careful about bias. The owner who withdraws all the profit every year leaves the business breathless.
Reserves are the business's cushion. Slow months, a broken piece of equipment, a client who delays payment—all of these are covered by the reserve without forcing you to borrow. As a practical guideline, many small businesses aim to set aside two to three months' worth of fixed expenses. In addition, the law on traders and commercial companies provides rules for companies' legal reserves. Your economist specifies this before the assembly's decision.
Reinvestment is the seed of the coming year. Profit that is reinvested in a new employee, in equipment, or in systems is profit that grows. This is also where the value of the business comes in. Buyers and banks want a business that has shown it can grow on its own money.
A common startup allocation is one-third for each direction. Then it's adjusted according to the stage. A new business retains more, a mature business distributes more.
A small wholesale trading company in Tirana closes the year with a net profit of 5,000,000 LEK after corporate tax. The assembly decides to distribute 40% to shareholders and 30% to reserves. Dividend 2,000,000 LEK. On this amount dividend tax of 8.1% is calculated, i.e. 160,000 LEK, and the owner receives 1,840,000 LEK. Reserve 1,500,000 LEK, which, together with the existing reserve, covers the company's fixed expenses for about three months. Reinvestment 1,500,000 LEK: a new warehouse worker and a stock management program. Next year, profits don't start from zero. They start from a stronger business.
In the Resource Center, find the profit-sharing sheet. Enter the net profit and the percentages for the three lines, and the sheet will generate the amounts, along with the calculated dividend tax. You'll find it under Resource Center.
Two technical points worth keeping in mind before the assembly's decision. The first is the source of the profit being distributed. Undistributed profits from years before 2019 may be taxed at the old rate of 15%, not 8%, so the identification of the years the amount comes from must be done before the resolution, not after. Second, the deadline for paying the withholding tax on dividends must be checked in the applicable tax calendar. Good practice is to draft the assembly resolution with exact amounts, the year of the profit's origin, and the payment date, so that the declaration to the tax authorities leaves no room for interpretation. For the full rates and procedures, the tax cluster covers the details.
Not necessarily. Profit can remain undistributed and be distributed in other years. The decision is made by considering the needs of the business and your own. It's important that withdrawals during the year not be made without a decision, because then the accounts get tangled and cleaning them up costs more.
Salary compensates your daily work and is taxed as wages, with the appropriate contributions. Dividends compensate your capital as a owner and are taxed at 8% when distributed. A clean-accounted owner keeps both separate and documented.
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