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 or partnership) that is registered by the corporation as the legal o ...
s during its partial or complete
liquidation
Liquidation is the process in accounting by which a company is brought to an end in Canada, United Kingdom, United States, Ireland, Australia, New Zealand, Italy, and many other countries. The assets and property of the company are redistrib ...
. 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 assets that may have debts or other liabilities attached to them. Equity is measured for accounting purposes by subtracting liabilities from the value of the assets. For example, if someone owns a car worth $2 ...
is distributed.
When a company has more
liabilities than
asset
In 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 positive economic value. Assets represent value of ownership that c ...
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 creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debto ...
liquidations.
Creditor
A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property ...
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, in that the capital invested in the corporation by its owners is returned to them, rather than only the
earnings.
See also
*
Dividend tax
A dividend tax is a tax imposed by a jurisdiction on dividends paid by a corporation to its shareholders (stockholders). The primary tax liability is that of the shareholder, though a tax obligation may also be imposed on the corporation in the ...
*
Liquidation
Liquidation is the process in accounting by which a company is brought to an end in Canada, United Kingdom, United States, Ireland, Australia, New Zealand, Italy, and many other countries. The assets and property of the company are redistrib ...
*
Shareholders' equity
In finance, equity is ownership of assets that may have debts or other liabilities attached to them. Equity is measured for accounting purposes by subtracting liabilities from the value of the assets. For example, if someone owns a car worth $2 ...
*
Special dividend
References
{{Reflist
External links
Accounting for liquidating dividends(
US GAAP)
Dividends