A liquidation distribution, also called a liquidating distribution or liquidating dividend, is a payment to the owners of a company or investment fund made in the course of winding it up. Once the entity's assets have been sold and its creditors paid, whatever is left is divided among shareholders or investors according to their rights. Holders of preferred stock with a liquidation preference are paid before ordinary shareholders, and in a private fund the proceeds follow the distribution waterfall.
The payment is a return of the owners' investment and not a distribution of profit, so for tax purposes it is generally treated as proceeds of disposing of the shares, giving rise to a capital gain or loss. For securities operations it is processed as a mandatory corporate action, after which the shares are cancelled. The legal process is described under liquidation and winding up; the final payment is a dissolution distribution.