Liquidating Dividend

What is a Liquidating Dividend

A liquidating dividend is a type of payment that a corporation makes to its shareholders during a partial or full liquidation. Generally, this form of distribution is produced using the company's capital base. As a return of capital, this distribution is typically not taxable for shareholders. A liquidating dividend is distinguished from standard dividends that are issued from the company's operating profits or retained earnings.

A liquidating dividend is likewise called liquidating distribution.

BREAKING DOWN Liquidating Dividend

A liquidating dividend might be made in at least one installments. All in the United States, a corporation paying out liquidating dividends will issue a Form 1099-DIV to its shareholders that details the amount of the distribution.

Despite certain tax advantages, investors who receive liquidation dividends often find that these still don't cover their initial investment as the company's fundamental quality has deteriorated.

Liquidating Dividend and Traditional Dividends

As a rule, with customary dividends, on and after the ex-dividend date, a seller is still entitled to the payout even if she/he has proactively sold it to a buyer. Essentially, a person who possesses the security on the ex-dividend date will receive the distribution, paying little heed to who currently holds the stock. The ex-dividend date is typically set for two business days prior to the record date. This is due to the T+3 system of settlement financial markets presently use in North America.

For a standard dividend, the declaration date or announcement date is the point at which a company's board of directors reports a distribution. The payment date is the point at which the company formally sends the dividend checks or credits them to investor accounts.

Liquidating Dividend and Liquidation Preference

In addition to a liquidating dividend, companies have a set order where they must re-pay their owners in the event of a liquidation. Liquidation can happen when a company is insolvent and cannot pay its obligations when they come due, among other reasons. As company operations end, remaining assets go to existing creditors and shareholders. Every one of these parties has a priority in the order of claims to company assets. The most senior claims have a place with secured creditors, trailed by unsecured creditors, including bondholders, the government (on the off chance that the company owes taxes) and employees (assuming the company owes them unpaid wages or other obligations). Preferred and common shareholders receive any excess assets, respectively.