Legal Definitions - nonliquidating distribution

A nonliquidating distribution refers to the transfer of assets, such as cash or property, from a business entity (like a corporation, partnership, or limited liability company) to its owners. The defining characteristic of this type of distribution is that it occurs while the business continues its operations and does not signify the dissolution, winding down, or termination of the entity. In essence, the business remains an ongoing concern after the distribution has been made.

Here are some examples to illustrate this concept:

• Example 1: Corporate Dividend Payout

  "Global Solutions Inc.," a large software development company, announces that it will pay its shareholders a quarterly cash dividend of $0.75 per share. This payment is made from the company's accumulated earnings and profits.

  This is a nonliquidating distribution because Global Solutions Inc. is simply sharing a portion of its profits with its owners while continuing to operate its software business as usual. The dividend does not indicate that the company is closing down, selling off its assets permanently, or ceasing its operations.

• Example 2: Partnership Profit Sharing

  "Artisan Crafts Studio," a partnership owned by two artists, has had a very successful year selling handmade goods. At the end of the fiscal year, the partners decide to distribute $15,000 each from the year's profits to themselves.

  This distribution of profits to the partners is nonliquidating because Artisan Crafts Studio will continue to create and sell art in the upcoming year. The distribution is a regular sharing of earnings among the owners, not a step towards dissolving the partnership or ending its business activities.

• Example 3: LLC Excess Cash Distribution

  "Bright Future Investments LLC," a real estate investment company, completes a profitable property sale and finds itself with substantial cash reserves beyond what is needed for its ongoing projects and operational expenses. The members (owners) decide to distribute $100,000 of this surplus cash among themselves.

  This is a nonliquidating distribution because Bright Future Investments LLC intends to remain active, seek new investment opportunities, and continue its real estate business. The distribution merely represents a payout of excess funds to its owners, not a signal that the company is going out of business or liquidating its assets.