Allocation of profits in limited liability companies – dividends, carry-forward, and the prudence rule

Fact-checked: October 1, 2026 · Swedish corporate law and accounting

Profit allocation describes how the general meeting decides to allocate the company's profit and available unrestricted equity. Common options include dividends or carrying the amount forward to new account. A dividend requires both sufficient distributable funds and compliance with the prudence rule.

What is profit allocation?

At the annual general meeting, the shareholders must decide on the allocation of the company's profit or loss according to the adopted balance sheet. The board of directors normally provides a proposal in the administration report.

The proposal may, for example, involve:

• distributing an amount to the shareholders,
• carrying all or parts of the unrestricted equity forward to new account,
• carrying out other allocations when permitted by law and the articles of association.

The difference between unrestricted and restricted equity

Dividends may not be paid out of restricted equity. Share capital, statutory reserves, and restricted share premium reserves are examples of items covered by capital protection. Unrestricted share premium reserves, retained earnings, and the profit for the year may, however, be included in unrestricted equity depending on the structure of the balance sheet.

The older article described the "share premium reserve" as if it were always unrestricted. Since the rules have changed, there are both restricted and unrestricted share premium reserves, so one must read the actual balance sheet.

When are profit dividends permitted?

Decisions on profit dividends are made by the general meeting. Under Chapter 17, Section 3 of the Swedish Companies Act, a transfer of value may not take place if, after the dividend, there is not full coverage for the company's restricted equity.

The calculation is based on the most recently adopted balance sheet, taking into account changes in restricted equity after the balance sheet date. Additionally, the dividend must be justifiable.

What does the prudence rule entail?

Even if there is formally unrestricted equity, the company may not distribute an amount that is unjustifiable considering the nature, scope, and risks of the business, as well as the company’s—and, where relevant, the group's—need for consolidation, liquidity, and general position.

When proposing a profit dividend, the board must provide a reasoned statement regarding the justification of the dividend in accordance with Chapter 18, Section 4 of the Swedish Companies Act.

How is profit allocation presented in the annual report?

The board's proposal for the allocation of available profit/unrestricted equity is presented in the administration report in accordance with applicable regulations. Subsequently, the annual general meeting makes the formal decision after the income statement and balance sheet have been adopted.

See the administration report and the annual general meeting.

Simplified example

According to the adopted balance sheet, a company has 300,000 SEK in unrestricted equity. The result for the year is -50,000 SEK, but previously retained earnings mean that there is still positive room for dividends at the balance sheet level.

This does not mean that 300,000 SEK can be distributed automatically. The board must, among other things, assess upcoming taxes, loans, working capital, investments, business risks, and liquidity. Only then can a justifiable dividend proposal be formulated.

Extra dividend

Profit dividends can also be decided at a general meeting other than the annual general meeting. In such cases, special rules apply regarding decision documentation, registration, and which balance sheet forms the basis for the dividend capacity. Do not use the annual general meeting's simplified procedure without checking the rules in Chapter 18 of the Swedish Companies Act.

Common mistakes

• Assuming that the current year's profit equals the maximum dividend amount.
• Believing that a loss for the year always prohibits dividends.
• Confusing restricted and unrestricted share premium reserves.
• Ignoring the prudence rule and only looking at the balance sheet.
• Lacking the board's reasoned statement when a dividend is proposed.
• Making dividend decisions without proper meeting documentation.

Sources

• The Swedish Companies Act (2005:551), Chapters 17–18.
• BFN – K2 Annual report for small companies