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A liquidating dividend is used when a corporation is dissolving and it needs to distribute its assets to its shareholders.

Creditors are always senior to shareholders in receiving the corporation's assets upon winding up.

However, in case all debts to creditors have been fully satisfied, there is a surplus left to divide among equity-holders.

A dividend paid to shareholders out of a company's capital or assets, rather than its earned income.When a company has more liabilities than assets, equity is negative and no liquidating distribution is made at all.This is usually the case in bankruptcy liquidations.That is, a liquidating dividend occurs when a company pays more than its total profit in dividends.This usually happens when shareholders believe that the company is no longer sustainable or profitable.Paid after satisfying all corporate debts, the liquidating dividend is meant to provide a return on investment.A corporation issues these dividends if it plans to terminate its business or if it plans to merge with another corporation under a new name.This concept is different than regular dividends, which are paid from the company's profits or retained earnings.This difference has income tax implications to shareholders.In effect, it shrinks the size of the company by reducing the capital accounts or equity by distributing it to the shareholders.To understand how a liquidating dividend works, you have to understand how a regular dividend works.