Liquidating dividend definition
/What is a Liquidating Dividend?
A liquidating dividend is a distribution of cash or other assets to shareholders, with the intent of shutting down a business. This dividend is paid out after all creditor and lender obligations have been settled, so the dividend payout should be one of the last actions taken before the business is closed. A liquidating dividend is essentially a return of the investors' original capital to them, plus or minus any residual retained earnings or retained losses (respectively) of the business. These dividends tend to be issued as a result of a decline in sales, so investors generally do not find that they have earned a profit on their investment after receiving the dividend.
Why a Liquidating Dividend is Issued
There are several circumstances under which a business may issue a liquidating dividend. Here are several possibilities:
Low returns. Liquidating dividends may be paid when the owners of a business do not believe that it is generating an adequate return.
Low valuation. Liquidating dividends may be paid when a company’s owners believe that the market is no longer placing a sufficient valuation on the entire business. In this case, their intent is to take their money out so that it can be repurposed elsewhere.
No involvement. The owners may no longer want to be involved in the management of the business, and so will shut it down in an orderly manner by issuing a liquidating dividend.
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FAQs
Is a Liquidating Dividend Recorded as Dividend Income?
No, a liquidating dividend is not recorded as dividend income. Instead, it is treated as a return of capital by the recipient. This means the payment reduces the investor’s cost basis in the investment. Only once the cost basis is fully recovered would any additional liquidating dividend be recognized as a capital gain, not income. This distinction is important for both accounting and tax purposes, as liquidating dividends reflect a partial return of the invested capital, often during the dissolution or wind-down of a company.