Also known as: liquidating distributions · liquidation distribution · liquidation distributions · distributions in liquidation · liquidating dividend
Written by attorneys · grounded in primary & secondary sources — see below
A distribution of assets by a dissolving corporation or partnership to its owners after the entity has paid or made reasonable provision for its creditors. The distribution occurs only once claims are discharged or secured so that remaining value reaches shareholders or partners according to their interests.
Lakewood Manufacturing sold its factory and paid all secured lenders. Its directors set aside funds for an unresolved supplier invoice and a possible tax audit claim before distributing the remaining cash to Lars Lindstrom as sole shareholder. The payment to Lars qualifies as a liquidating distribution because the board first discharged or reserved for known liabilities under the statutory winding-up rules.
Lunar Dynamics LP completed its final project and paid all outside creditors. The general partner then transferred the remaining cash to limited partner Luna Lang in proportion to her transferable interest. The transfer constitutes a liquidating distribution because it followed full satisfaction of partnership obligations and allocated surplus according to pre-dissolution rights.
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Directors must first discharge or make reasonable provision for all claims. Only after satisfying that requirement may the corporation distribute remaining assets to shareholders.
No. The statute permits reasonable provision for contingent claims rather than full payment of every conceivable exposure. Directors may set aside targeted reserves based on known information without immobilizing the entire upper range of an unasserted claim.
A liquidating distribution occurs only during dissolution after creditors are addressed and ends the owner's interest in the entity. A nonliquidating distribution occurs while the business continues and does not terminate ownership.
After creditors are paid, the partnership must first return the value of unreturned capital contributions reflected in transferable interests. Only then may any remaining surplus be allocated according to pre-dissolution distribution rights.