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What is a business development corporation (BDC)?

 


A BDC is a pass-through entity, created by the fiat of the U.S. Congress and the signature of President Jimmy Carter in 1980 to encourage investment in small and medium sized privately owned U.S. operating companies. 

By "operating companies" one means companies that construct and sell things or provide services, as distinct from companies that exist chiefly to move money around, like BDCs themselves. BDCs are not supposed to invest in each other or other financial entities. 

Anyway: HOW did the creation of 1980 law encourage such investment? By pass-through taxation. A BDC, so long as it follows the rules, is NOT a taxable entity. Its income is regarded as passing through directly to its investors, so that stream of income is taxed once (as the income OF the BDC investors) not twice. 

What do they have to do to remain untaxed? There are two big mandates involved. The 70% rule and the 90% rule. They must have 70% of their assets invested in the sort of instruments that justify this special tax treatment: long-term equity or debt in unlisted US companies. Also, they cannot retain much of their income from year to year. They must distribute to their stockholders at least 90% of their income as dividends.  

Just laying this out here so that, should I have something substantive to say about BDCs in the near future, I'll refer back to it. Thanks for listening. 

By the way, yes, I know BDC is also a K-pop/ boy band. Image above.



Comments

  1. Replies
    1. A different thing from the BDCs of the 1980 Act. The BDC doesn't try to motivate the operating company any more than venture funds motivate theirs. If you watch Shark Tank you know, the entrepreneurs have typically been very motivated people long before they got to the tank. What they want from the sharks is money, with the fewest strings attached they can manage.

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