One of the most common questions among partners and directors is: is it mandatory to distribute dividends in a limited liability company? The short answer is: not always. However, Spanish corporate law includes scenarios where such distribution becomes mandatory, depending on specific legal requirements.
At ALR Asesoría, we guide our clients through critical decisions, including how to manage company profits. We’ve seen how a lack of clarity on this topic can trigger internal conflicts. That’s why understanding what the law says — and applying it wisely — is essential to avoid misunderstandings and legal disputes between partners.
What does the Spanish Corporate Law say?
The Spanish Companies Act (Ley de Sociedades de Capital – LSC) states that the general meeting decides how to apply annual profits. Generally, the company has no obligation to pay dividends every year. However, if a partner meets specific conditions, they can legally request a dividend distribution.
Still, it’s important to understand that it is mandatory to distribute dividends in a limited liability company only when the law specifically provides for it — particularly under Article 348 bis of the LSC.
This distinction is crucial. Many partners confuse the board’s decision-making freedom with a supposed obligation to distribute. The law protects the company’s flexibility but also grants rights to minority shareholders under certain circumstances.
Article 348 bis: when can dividends be claimed?
Article 348 bis is the legal foundation for determining when it is mandatory to distribute dividends in a limited liability company. This article gives minority shareholders the right to leave the company if it fails to distribute a minimum percentage of profits.
To apply this rule, several conditions must be met:
- The company must have completed at least five years since its formation.
- The business must have distributable profits according to the law.
- At least one-third of those profits must remain undistributed.
- The shareholder must hold at least 25% of the share capital.
- The partner must have voted against the decision not to distribute during the general meeting.
If these requirements are met, the partner may exercise their right of separation, meaning they can exit the company and demand payment for the value of their shares. This has significant financial and legal implications.
What happens if the company doesn’t comply?
If a limited liability company refuses to distribute dividends when all legal conditions apply, the consequences can be serious. The shareholder can file legal action and, in some cases, seek compensation.
At ALR Asesoría, we’ve handled several situations like these. Usually, the conflict starts with a lack of knowledge. However, ignorance does not exempt a company from its legal obligations. That’s why we insist: it is mandatory to distribute dividends in a limited liability company whenever the law requires it, particularly under Article 348 bis.
How to prevent internal conflicts
To avoid problems between partners and ensure proper profit management, we recommend:
- Establish a clear dividend policy in the company bylaws.
- Reach agreements in advance between partners on how to share profits.
- Consult with legal and tax experts before closing the annual accounts.
These good practices help maintain internal harmony and ensure legal certainty for all stakeholders.
Conclusion
In summary, is it mandatory to distribute dividends in a limited liability company? The answer depends on whether specific legal requirements are met. The general meeting has the power to decide how profits are used, but this power has limits.
Article 348 bis exists to protect minority shareholders and ensure they receive a fair return when the company generates profits. Ignoring this right can lead to serious legal and financial consequences.
At ALR Asesoría, we are here to help you make sound, compliant decisions. Whether you are a partner or a manager, our team can guide you with clarity and expertise.