Legal Definitions - liquidating dividend

A liquidating dividend is a payment made by a corporation to its shareholders that represents a return of their original capital investment, rather than a distribution of the company's accumulated profits. These dividends typically occur when a company is dissolving, winding down its operations, or selling off a significant portion of its assets. Unlike regular dividends, which are paid from a company's earnings, a liquidating dividend reduces the shareholders' basis (their cost of investment) in the company.

• Example 1: Small Business Dissolution

  A small, independent bookstore, "The Literary Nook," has been struggling financially and its owner decides to close the business permanently. After selling off all its remaining inventory, bookshelves, and other assets, and paying all outstanding debts, the owner distributes the remaining cash to the original investors who helped fund the store's opening. This distribution is a liquidating dividend.

  This illustrates a liquidating dividend because the payment is a return of the investors' initial capital as the company ceases operations and dissolves, rather than a share of ongoing profits.

• Example 2: Major Corporate Asset Sale

  A large multinational conglomerate, "Global Innovations Inc.," decides to streamline its operations and sells off its entire agricultural technology division, which includes several factories and extensive intellectual property, for a substantial sum. Instead of reinvesting all the proceeds into its remaining divisions, Global Innovations Inc. distributes a significant portion of the cash directly to its shareholders as a special payout.

  This payment is a liquidating dividend because it originates from the sale of a major corporate asset and represents a return of capital to shareholders, signifying a reduction in the company's overall capital structure, rather than a payout from its regular operational earnings.