Liquidating distribution

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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 shareholders during its partial or complete liquidation. [1] Liquidating distributions are not paid solely out of the profits of the corporation. Instead, the entire amount of shareholders' equity is distributed. [2] When a company has more liabilities than assets, 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.

A shareholder is an individual or institution that legally owns one or more shares of stock in a public or private corporation. Shareholders may be referred to as members of a corporation. Legally, a person is not a shareholder in a corporation until their name and other details are entered in the corporation‘s register of shareholders or members.

Liquidation is the process in accounting by which a company is brought to an end in the United Kingdom, Republic of Ireland and United States. The assets and property of the company are redistributed. Liquidation is also sometimes referred to as winding-up or dissolution, although dissolution technically refers to the last stage of liquidation. The process of liquidation also arises when customs, an authority or agency in a country responsible for collecting and safeguarding customs duties, determines the final computation or ascertainment of the duties or drawback accruing on an entry.

Liability (financial accounting) sum of the equity and the liabilities

In financial accounting, a liability is defined as the future sacrifices of economic benefits that the entity is obliged to make to other entities as a result of past transactions or other past events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future.

Contents

Cases

A dividend may be referred to as liquidating dividend when a company:

  1. Goes out of business and the net assets of the company (after all liabilities have been paid) are distributed to shareholders, or
  2. 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.

Return of capital (ROC) refers to principal payments back to "capital owners" that exceed the growth of a business or investment. It should not be confused with Rate of Return (ROR), which measures a gain or loss on an investment. Basically, it is a return of some or all of the initial investment, which reduces the basis on that investment.

The retained earnings of a corporation is the accumulated net income of the corporation that is retained by the corporation at a particular point of time, such as at the end of the reporting period. At the end of that period, the net income at that point is transferred from the Profit and Loss Account to the retained earnings account. If the balance of the retained earnings account is negative it may be called accumulated losses, retained losses or accumulated deficit, or similar terminology.

See also

A dividend tax is the tax imposed by a tax authority on dividends received by shareholders (stockholders) of a company.

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.

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References

  1. "Contemporary Tax Practice Research, Planning and Strategies Student Resource Center". tax.cchgroup.com. Retrieved 2014-02-04.
  2. Grimes, Marion (1946-03-31). "Corporations: Liquidating Dividends by Wasting Asset Corporations in California". California Law Review (Volume 34, Issue 1). Retrieved 2014-02-04.