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Profit prior to incorporation is that profit which a company gets between the period of date of buying and date of incorporation. Suppose, A company buys XYZ company on1st Jan.2010 and it has to incorporate at1st April2010. Then profit between1st Jan.2010 and1st April2010 will be profit prior to incorporation. This profit can not be used for paying dividend to shareholders. Because current shareholder’s capital is not involved for this profit, so this will be capitalized profit and it will be transferred to capital reserve account. If company gets loss prior to incorporation, it will be transferred to goodwill account.
I agree with Mr. Ayoub answer
Any profit which is generated before the incorporation of a new company, it could be the profit of old company or from the sale of unwanted stock of existing company but it cannot be used to pay the dividend of new company.
