Legal Definitions - liquidation dividend

A liquidation dividend is a distribution of a company's assets to its shareholders when the company is being dissolved or "liquidated." Unlike a regular dividend, which is paid from a company's ongoing profits, a liquidation dividend represents a shareholder's share of the company's remaining assets after all its debts and liabilities have been paid off during the process of winding down its operations.

Here are some examples to illustrate this concept:

• Example 1: Small Business Closure

  Imagine "The Daily Grind," a local coffee shop, decides to close its doors permanently because the owners are retiring. After selling all the espresso machines, furniture, and remaining inventory, and paying off all outstanding bills to suppliers, employees, and the landlord, there's still a significant amount of cash left in the company's bank account. This remaining cash is then distributed among the coffee shop's owners, who are also its shareholders, in proportion to their ownership stakes. This final distribution of assets is a liquidation dividend.

• Example 2: Tech Startup Dissolution

  "InnovateX," a promising tech startup, unfortunately, runs out of funding and fails to secure new investment. The board of directors decides to cease operations and liquidate the company. They sell off the company's intellectual property, office equipment, and any remaining software licenses. After using these proceeds to pay off creditors, including lenders and former employees, any leftover funds are distributed to the venture capitalists and angel investors who held shares in InnovateX. These payments to the investors are considered liquidation dividends.

• Example 3: Corporate Subsidiary Wind-Down

  A large multinational conglomerate, "Global Industries Inc.," decides to exit the textile manufacturing business entirely. It owns a subsidiary company, "Fabricorp," which specializes in textiles. Global Industries Inc. decides to dissolve Fabricorp. Fabricorp sells its factories, machinery, and raw materials, and uses the money to pay off its bank loans, supplier invoices, and employee severance packages. Once all of Fabricorp's debts are settled, any remaining cash or assets are transferred to Global Industries Inc., as the sole shareholder of Fabricorp. This final transfer of assets from Fabricorp to its parent company is a liquidation dividend.