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What is a Liquidation Dividend? A Comprehensive Legal Overview
Definition & Meaning
A liquidation dividend is a payment made to shareholders of a corporation that is in the process of dissolving. This type of dividend is typically distributed from the company's capital after it has decided to cease all or part of its business operations. Shareholders receive liquidation dividends after the corporation has sold its assets and settled its debts with creditors. Unlike regular dividends, which are paid from profits, liquidation dividends are considered a return of the shareholders' original investments.
Table of content
Legal Use & context
Liquidation dividends are relevant in corporate law, particularly during the dissolution process of a company. This term is often encountered in situations where a corporation is winding down its operations and liquidating its assets. Legal practitioners may deal with liquidation dividends when advising corporations on compliance with state laws regarding asset distribution, creditor payments, and shareholder rights. Users can manage aspects of this process using legal forms available through platforms like US Legal Forms.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
Example 1: A technology startup decides to close its doors after failing to secure additional funding. After selling its office equipment and intellectual property, it pays off its debts and distributes the remaining funds to its shareholders as a liquidation dividend.
Example 2: A manufacturing company goes bankrupt and liquidates its assets. Once all creditors are satisfied, the remaining capital is distributed to shareholders as a liquidation dividend. (hypothetical example)
State-by-state differences
Examples of state differences (not exhaustive):
State
Key Differences
California
Liquidation dividends must be approved by the board of directors and shareholders.
Delaware
Specific procedures must be followed for notifying creditors before distributing dividends.
New York
Shareholders must receive a written notice detailing the liquidation process and dividend distribution.
This is not a complete list. State laws vary, and users should consult local rules for specific guidance.
Comparison with related terms
Term
Definition
Key Differences
Liquidation Dividend
A payment to shareholders during a corporation's dissolution.
Paid from capital after debts are settled.
Regular Dividend
A distribution of profits to shareholders.
Paid from the company's profits, not capital.
Capital Distribution
Return of capital to shareholders.
Can occur during liquidation or ongoing operations.
Common misunderstandings
What to do if this term applies to you
If you are a shareholder in a corporation that is dissolving and may receive a liquidation dividend, consider the following steps:
Review the corporation's dissolution plan and any communications regarding dividend distribution.
Consult with a legal professional to understand your rights and the process involved.
Explore US Legal Forms for templates that may assist in the dissolution process or shareholder communications.
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