Understanding Legal Reserves (Section 1202): What You Need to Know Before Paying Dividends

When your company makes a profit and plans to pay dividends to shareholders, there is one important rule every business owner and director should know: the law does not allow you to distribute all profits right away. Under Section 1202 of the Civil and Commercial Code, you must set aside a portion as a “Legal Reserve” to ensure the company’s financial stability.

The Simple Rule of Section 1202

The law states that “every time a company pays a dividend, it must set aside at least 5% of its profits into a reserve fund until that fund reaches 10% of the company’s registered capital” (or a higher percentage if stated in the company’s Articles of Association).

How It Works: A Quick Example (Company XYZ)

• Suppose Company XYZ has a registered capital of 10,000,000 THB, with 0 THB in existing legal reserves (first-time payout). Its statutory minimum legal reserve target is 10%, which is 1,000,000 THB.
• This year, the company makes a net profit of 1,000,000 THB and the shareholders’ meeting approves a dividend payout.
• Before paying out shareholders, Company XYZ must set aside at least 5% of the profit (50,000 THB) and record it into the Legal Reserve account on its balance sheet. The remaining profit (950,000 THB) can then be distributed as dividends.
• You will repeat this step every time dividends are paid until the reserve fund reaches 1,000,000 THB. Once you hit that target, no further reserve is needed—unless the company increases its registered capital later on.

3 Key Takeaways for Business Owners

1. No Dividends, No Reserve Needed: You only need to set aside a legal reserve when you actually distribute dividends. If the company makes a profit but chooses to keep the money in the business for future growth, no reserve allocation is required.
2. Check Your Company’s Articles of Association: The 5% rate and 10% cap are just the legal minimums. Some companies set higher reserve requirements in their own internal rules (Articles of Association), so always double-check before declaring dividends.
3. Directors Bear the Responsibility: Paying dividends without properly setting aside the legal reserve violates the law. If this causes financial harm to the company or its creditors later, the company directors could be held personally liable.