A liquidating distribution (or liquidating dividend) is a type of nondividend distribution made by a corporation or a partnership to its
shareholders during its partial or complete
liquidation. 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 can ...
s, equity is negative and no liquidating distribution is made at all. This is usually the case in
bankruptcy liquidations.
Creditors 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
Return of capital (ROC) refers to principal 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 with Rate of Return (ROR ...
, 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's operation. Earnings is also the amount on which corporate tax is due. For an analysis of specific aspects of corporate operations several more specific terms are used as EBIT (earnings before intere ...
.
See also
*
Dividend tax
*
Liquidation
*
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
A special dividend is a payment made by a company to its shareholders, that the company declares to be separate from the typical recurring dividend cycle, if any, for the company.
Usually when a company raises the amount of its normal dividend, t ...
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) and is the default accounting standard used by companies based in the Uni ...
)
Dividends