Many business people know that S corporations and limited liability companies (LLCs) are tools to skip tax on a business’s income. But did you know that Subchapter T allows certain enterprises to benefit from the corporate form AND pass profits through to members tax-free?
Subchapter T of the Internal Revenue Code allows qualifying corporations to subtract “patronage dividends” from the corporation’s taxable income. Patronage dividends are NOT dividends on stock, despite the confusing use of the same word. Patronage dividends work like this:
The enterprise does business with patrons: selling to them, buying from them, and/or employing them and making profit through their labor. Then the profit is shared among the patrons in proportion to the quantity or value of business each patron did with the enterprise.
This arrangement is appropriate for worker-owned business, and potentially any type of enterprise that shares its profits with its customers, users, or suppliers in a meaningful way. This arrangement will NOT work for any business that wants to return profits only to investors.
How to qualify:
First, the business must be “operating on a cooperative basis.” This means:[…]
This post was originally published on CuttingEdgeCapital.com
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