Corporations often retain some of their earnings -- that is, put a portion of their revenue back into the company by purchasing treasury stock or purchasing equipment for the business. Texas law allows corporations to use retained earnings to cover dividend payments under certain circumstances. The company must have more than enough in retained earnings to cover the payments and must follow all corporate policies regarding dividend payments.
The Texas Business Corporation Act restricts businesses from paying dividends if there is a surplus. Specifically, no Texas business may pay dividends to any stockholder if the business' surplus revenue after paying all expenses is less than the amount of capital that must be transferred to stated capital. Both Texas law and an individual corporation's bylaws govern the minimum capital that must be transferred to stated capital.
A company's board of directors must authorize dividend payments from retained earnings before the company can make any such payments. If the board of directors authorizes payment from unissued shares, the company must issue the shares. The shares must be issued at par value or, if there is no par value, a value agreed upon by the board of directors, and a portion of the issue must be transferred to stated capital.
The board of directors determines the amount of surplus that must be transferred to stated capital before the corporation can issue dividend payments. However, when the company issues shares to cover payments from retained earnings, it must transfer a portion of these stock issues to stated capital that is not less than the aggregate par value of the shares.
Other Classes of Stock
These same rules apply to paying dividends that properly belong to one class of stockholder to any other class of stockholder. For example, if preferred stockholders are supposed to get preferred dividends of 10 percent, the board of directors must go through the authorization process and put aside a portion of issued stock revenue before it can give these dividends to common stockholders.