What are liquidating dividends

You'll also learn why some companies refuse to pay dividends while others pay substantially more, how to calculate dividend yield, and how to use dividend-payout ratios to estimate the maximum sustainable growth rate for a given company's dividend.Companies that earn a profit can either pay that profit out to shareholders, reinvest it in the business through expansion, debt reduction or share repurchases, or both.While there are several reasons for doing this, one reason is to eliminate the double taxation feature of corporations.As part of the conversion, the assets owned by the corporation must first be transferred to the shareholders in exchange for stock.Liquidation is generally accomplished by either selling these assets or transferring all of the shares in the corporation.Possible reasons requiring liquidation are the closing or sale of the business or changing the business structure to provide more favorable tax treatment.As part of every liquidation, state and federal income, payroll and capital gains taxes must be paid at both the corporate and individual levels.A C corporation is a business entity governed by Subchapter C of the Internal Revenue Code.

This liquidation results in an initial tax on the corporation for any gains on the property.Each of these actions produces potentially taxable events at the corporate and individual shareholder levels.The owners of a C corporation may be interested in converting the company into a limited liability company, or LLC.If the stocks are transferred instead, this will result in a capital gains tax on any appreciated value in the stocks at both the corporate and shareholder level.Many owners choose this option because the capital gains tax rate is lower than the rate applied to the sale of appreciated assets.

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