Corporate Dividend and Distribution Requirements in North Carolina

At a glance

Requirements one by one

Governing law, forms, and board authority

Section § 55-1-40(4), (6), (6a), (19) limits the ordinary rule to a North Carolina domestic for-profit or stock corporation and defines distribution to reach money, property, indebtedness, dividends, purchases, redemptions, and other acquisitions. The definition excludes the corporation's own shares as the property transferred; share dividends have their own section.

The board authorizes under § 55-6-40(a)-(d), subject to the articles and both financial tests. A committee may act only under a board-prescribed formula, method, or set of limits under § 55-8-25(d)-(f).

A unanimous private-company agreement may change authorization

Section § 55-7-31(b), (d), (f) allows a nonpublic corporation's unanimous current-shareholder agreement to govern authorization or making of distributions, including disproportionate distributions. It must use the specified articles/bylaw approval or written signed agreement made known to the corporation. It ends if the corporation becomes public and cannot displace § 55-6-40's financial limits. Section § 55-8-01(a)-(d) treats persons receiving board authority under valid articles or agreement provisions as the board for the Chapter's purposes.

Ordinary voluntary distributions use no separate source test

Section 55-6-40 does not require an ordinary voluntary distribution to come from surplus, retained earnings, or current net profits. Instead, subsection (c) asks the two post-distribution questions below.

North Carolina does retain a narrow historical overlay. Sections §§ 55-6-01(a), (d) and 55-1-40(6a) preserve a dividend credit for qualifying noncumulative preferred shares first issued from a class or series after June 30, 1957, and before October 1, 1969; subordinate dividends wait until that credit is discharged.

Liquidity, assets, liabilities, and preferences

The first § 55-6-40(c) test requires the corporation to remain able to pay debts as they become due in the usual course. The second requires total assets to remain at least equal to total liabilities plus the amount needed on a hypothetical dissolution for superior shareholder preferences. The articles may permit omission of that preference add-on, but not either underlying test.

Financial statements, valuation, and reliance

Section 55-6-40(d) permits reasonable-under-the-circumstances accounting statements and book values, fair valuation, or another reasonable method. Section § 55-8-30(a)-(c) separately permits a director who lacks contrary actual knowledge to rely on reliable corporate personnel, competent experts, or a board committee the director reasonably believes merits confidence.

Record date and measurement timing

Under § 55-7-07(a)-(b), the bylaws may fix a record date or its method; otherwise the board may choose a future date no more than 70 days before the action. Sections 55-6-23(c) and 55-6-40(b) make authorization date the default for a share dividend or ordinary distribution.

Section § 55-6-40(e)-(g) uses the earlier of transfer or debt incurrence and the end of shareholder status for an own-share acquisition. Distributed debt is tested when distributed. Other payments use authorization date if made within 120 days and payment date if made later.

Share dividends, class terms, and fractions

Section § 55-6-23 makes share dividends pro rata and without consideration by default. A cross-class issue requires article authorization, no outstanding shares of the class or series being issued, or majority approval by that class or series for a stated number issued within no more than one year.

Section § 55-6-04 permits fractions, cash value, disposition with proceeds to holders, or scrip. A fraction carries shareholder rights; scrip carries them only if its terms say so. Class and series preferences and identical terms come from § 55-6-01.

Distribution debt and dissolution

Section 55-6-40(f) places compliant distribution debt at parity with general unsecured debt unless an agreement provides otherwise. Subsection (g) permits properly conditional debt to be omitted from the test liabilities and retests each principal or interest payment when paid.

For dissolution, § 55-14-05(a) supplies the separate sequence: discharge or provide for liabilities, then distribute remaining property among shareholders according to their interests.

What trips people up

The ordinary voluntary-distribution rule is not the whole of § 55-6-40. Subsections § 55-6-40(h)-(j) preserve a separate compelled-dividend process for certain corporations with fewer than 25 shareholders when at least 20% of a class makes a timely demand based on the prior fiscal period's net profits. That route includes exceptions, a possible corporation-elected redemption, and court procedure; it is a dispute remedy, not a surplus source test for the voluntary board payment summarized here.

The 120-day rule sets the financial-test date, not the shareholder record date. A payment after that window is tested when paid even if the holder list was fixed earlier under § 55-7-07 or § 55-6-40(b).

Common questions

May shareholders authorize a disproportionate distribution?

Potentially, through a § 55-7-31 agreement that satisfies the unanimous private- company requirements. The distribution still must pass § 55-6-40.

Can a committee approve an ordinary dividend?

Only within a formula, method, or limits prescribed by the board under § 55-8-25(e)(1). A general committee delegation does not remove that condition.

Does a share dividend need a separate record date?

The board may fix one. If it does not, § 55-6-23(c) makes the authorization date the record date for the share dividend.

Statutes and sources

• N.C. Gen. Stat. §§ 55-1-40, 55-6-01, 55-6-04, 55-6-23, and 55-6-40 — definitions, class and fraction rules, share dividends, ordinary tests, valuation, timing, debt, and the separate close-company demand boundary. § 55-6-40 (accessed September 3, 2026).
• N.C. Gen. Stat. §§ 55-7-07, 55-7-31, 55-8-01, 55-8-25, and 55-8-30 — record dates, shareholder agreements, board/committee authority, and reliance. § 55-7-31 (accessed September 3, 2026).
• N.C. Gen. Stat. § 55-14-05 — post-dissolution liability and property- distribution sequence. Official text (accessed September 3, 2026).