C corporation liquidating dividend
Managing the level of corporate taxable income by paying compensation to shareholder-employees may be a difficult strategy to implement where there is more than one shareholder and the individual shareholder-employees do not believe that compensation payments that are proportionate to stockholdings accurately reflect their respective contributions to the success of the enterprise.
§ 151 Classes and series of stock; redemption; rights. The board of directors may determine the amount of consideration for which shares may be issued by setting a minimum amount of consideration or approving a formula by which the amount or minimum amount of consideration is determined.
Any stock which may be made redeemable under this section may be redeemed for cash, property or rights, including securities of the same or another corporation, at such time or times, price or prices, or rate or rates, and with such adjustments, as shall be stated in the certificate of incorporation or in the resolution or resolutions providing for the issue of such stock adopted by the board of directors pursuant to subsection (a) of this section.
This distinguishes a liquidating dividend from regular dividends, which are issued from the company's operating profits or retained earnings. A liquidating dividend may be made in one or more installments. S., a corporation paying out liquidating dividends will issue to its shareholders a Form 1099-DIV showing the amount of the distribution.If a corporation has elected to be an S corporation or a business is not operated in corporate form (e.g., partnership, limited partnership, or limited liability company (LLC)), there is only one level of taxation at the owner level, and a savings of 9.75% of taxable income, assuming the owners are individuals taxed at the highest individual rate.This difference is even greater when taking into account state taxation.Distributions of qualified dividends to individual shareholders are taxed again at a federal rate of 15%, and those dividends are not deductible by the corporation.Thus, the total federal tax rate on distributed earnings from a C corporation is 44.75% [(1 × 0.35) (.15 × (1 – 0.35)].