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A liquidating distribution (or liquidating dividend) is a type of nondividend distribution made by a corporation or a partnership to its
shareholder A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a Trust law, trust or partnership) that is registered by the corporation as the ...
s during its partial or complete
liquidation Liquidation is the process in accounting by which a company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal personality, legal or a mixture o ...
. Liquidating distributions are not paid solely out of the profits of the corporation. Instead, the entire amount of
shareholders' equity In finance, equity is ownership of asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce posi ...
is distributed. When a company has more
liabilities Liability may refer to: Law * Legal liability, in both civil and criminal law ** Public liability, part of the law of tort which focuses on civil wrongs ** Product liability, the area of law in which manufacturers, distributors, suppliers, re ...
than
asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...
s, equity is negative and no liquidating distribution is made at all. This is usually the case in
bankruptcy Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditor A creditor or lender is a party 300px, '' Hip, Hip, Hurrah!'' (1888) by Peder Severin Krøyer, a painting portraying an artists' par ...

bankruptcy
liquidations.
Creditor A creditor or lender is a party 300px, '' Hip, Hip, Hurrah!'' (1888) by Peder Severin Krøyer, a painting portraying an artists' party in 19th century Denmark A party is a gathering of people who have been invited by a host A host is ...

Creditor
s are always senior to shareholders in receiving the corporation's assets upon winding up. However, in case all debts to creditors have been fully satisfied, there is a surplus left to divide among equity-holders. This mainly occurs during voluntary liquidations of solvent corporations.


Cases

A dividend may be referred to as liquidating dividend when a company: # Goes out of business and the net assets of the company (after all liabilities have been paid) are distributed to shareholders, or # Sells a portion of its business for cash and the proceeds are distributed to shareholders. Liquidating distributions can be viewed as a form of
return of capital {{Unreferenced, date=February 2007 Return of capital (ROC) refers to payments back to "capital owners" (shareholders, partners, unitholders) that exceed the growth (net income/taxable income) of a business or investment. It should not be confused ...
, in that the capital invested in the corporation by its owners is returned to them, rather than only the
earnings Earnings are the net benefits of a corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), state to act as a single entity (a legal entity recognized by private and public law ...
.


See also

*
Dividend tax A dividend tax is a tax imposed by a jurisdiction on dividend A dividend is a distribution of profit Profit may refer to: Business and law * Profit (accounting), the difference between the purchase price and the costs of bringing to market * ...
*
Liquidation Liquidation is the process in accounting by which a company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal personality, legal or a mixture o ...
*
Shareholders' equity In finance, equity is ownership of asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce posi ...
*
Special dividendA special dividend is a payment made by a company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal personality, legal or a mixture of both, with a sp ...


References

{{Reflist


External links


Accounting for liquidating dividends
(
US GAAP Generally Accepted Accounting Principles (GAAP or U.S. GAAP, pronounced like "gap") is the accounting standard adopted by the U.S. Securities and Exchange Commission (SEC). While the SEC previously stated that it intends to move from U.S. GAAP ...
) Dividends