Dividend

Definition

Profit a corporation pays its owners out of money already taxed once.

Why It Matters

Most businesses bought at this size are pass-throughs, so the money an owner takes is a draw or a distribution and not a dividend, and calling it the wrong thing is how the tax gets counted twice. A C corporation is where the word is literal: the company pays tax on the profit and the owner pays again on the payment, which is the double tax every adviser warns about. That matters in diligence, because a C corporation target can often be bought in a way that avoids inheriting it, and it matters after close, because an S corporation owner is expected on a reasonable salary before anything else moves. Whatever it is called, an SBA loan agreement usually has to bless it while the note is young.

In numbers: On $400,000 of C corporation profit, 21% federal tax leaves $316,000, and a dividend of that is taxed again in the owner's hands, which is why the same money in a pass-through is worth more to the same person.