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How is a company like Reddit “not profitable” yet?
(lemmy.world)
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this post was submitted on 23 Jun 2023
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No Stupid Questions
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Ok, commenters here don't understand how businesses work. So, let me explain it real quick.
If a company doesn't trade publicly, then making profit doesn't make any sense. Companies must pay taxes from profits, so if you make any profit, you will lose money.
Small example with made up numbers (as taxes are different in different countries). Your company makes £100 in profit in year X. Corporate tax is 10%. That means that you have to give £10 to the tax man and you're left with £90 instead of £100. You just wasted £10 for no reason.
So what do you do instead? There are multiple options to get rid of profit and turn your hard earned £100 into something useful. And usually multiple things are done throughout the year. You can pay dividends to your private investors and yourself. You can invest money back into business and buy something useful like a new coffee machine, a laptop, some patents, etc. You can pay bonuses to your workers. And there are many other things to do.
Now you might ask why do taxes work this way? It's actually a genius solution to an old problem no one has experienced in centuries - money hoarding. Current tax system forces companies to reinvest money into economy one way or another through natural greed of their owners. Because otherwise they would just hoard money and destroy the economy.
And here's some fun trivia: if you own a private company and you have profit - you're dumb. Well, it's not fun actually, you should hire a professional accountant who will help you out.
Tbh it depends. Usually it is like you say, but it depends on the goals of the owner. Steam is private for years and they make profits. Also if you have smaller business and you treat it like your business, you just want to get sallary for what you do. "Dumb" is too strong word as it depends on your position and goals
First of all, Steam being profitable doesn't mean anything, because Steam is not a company. Company is Valve Corporation. Also please don't confuse profit with revenue. Valve Corporation has a very high revenue, but their profit is not disclosed anywhere. I don't live in the US, so I don't know how to check what their tax man knows about them, but I don't think they have much profit and pay much taxes.
Also if you actually have a small business, then you would know, that you don't want salary or anything that incures taxes. You will buy yourself a car without VAT from company profit, you will fill it up with petrol from company profit, you will buy yourself new laptop from company profit, etc. But you'll keep your salary as low as possible and you'll avoid paying any taxes, including VAT. Everything that can bought through your company legally will be bought through your company and then some.
It is stupid to buy something just to avoid taxes. If it helps you grow a business - sure. But not to avoid paying taxes. As I said it depends on your goal. If you want your business to grow, have the best seed round or in general company valuation - yeah, reinvest. But if it is business that you do to make a living, it is stupid to spend everything just to not pay taxes
No, wasting money on taxes is stupid. That's how you end up bankrupt in a few years later.
Wasting money is not a good way to avoid taxes.
You're not wasting money, you're reinvesting them into the business one way or another. Paying taxes is a waste of money.
You can't deduct dividends from profit for tax purposes. This is just wrong, the aim of companies is to eventually recognise a profit to return to shareholders.
There are certain things you can do to make sure your profit is recognised in a favourable regime (e.g. Google recognising profits in Ireland) and there are tax incentives to reinvest in the company but at the end of the day, the value of the company is the value of all profits its expected to generate in the future. If that were 0 then the value of the company is 0.