To understand how a liquidating dividend works, you have to understand how a regular dividend works.
A regular dividend is the distribution on profits or retained earnings for a period.
The term liquidating dividend refers to the process of providing shareholders with a partial or full distribution of their capital investment in the company.
Liquidating dividends are typically paid when a company is going out of business or has sold a portion of the enterprise.
That is, a liquidating dividend occurs when a company pays more than its total profit in dividends.
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This is the amount of money the company has earned in addition to the original amount of money the shareholders invested to start the business.
In other words, this is a return on the investors investment in the company.
Therefore, liquidating dividends are considered a return of shareholders' investments, rather than profit on them.
All of the firm's debts must be paid before it can pay liquidating dividends. A pro rata distribution of cash or property to stockholders as part of the dissolution of a business.