[1] Liquidating distributions are not paid solely out of the profits of the corporation.
[2] When a company has more liabilities than assets, equity is negative and no liquidating distribution is made at all.
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 may be referred to as liquidating dividend when a company: Liquidating distributions can be viewed as a form of return of capital, in that the capital invested in the corporation by its owners is returned to them, rather than only the earnings.