Do you want to know if there is a law in USA, Australia, Canada or UK that sets a limit to how much profit a company can make? If YES, i advice you read on. In the United States or anywhere in the world, making too much profit will surely attract competition to the company or products. And competitors are not stupid, at least not most of them.
They probably know how much it costs to manufacture a similar product and also have a pretty good idea about the company sales and market size, and will look to upset those odds. Profits are hard to come by – The profit line in the United States ranges from 5 percent for a startup to 20 percent for a mature, established $10 million-plus business.
Note that this is a ballpark approximation for a general small business, weighted towards service-related businesses since that’s the majority of what’s out there.
Is There a Law That Sets a Limit to How Much Profit a Company Can Make
Directly, there are no laws in the United States or anywhere in the world that limits the amount of profit a company can make. Rather, the more profit a company makes, the more tax they are expected to pay to the government. Additionally, businesses hardly make too many profits, unless the company has an extremely unique and impossible to duplicate product.
According to “U.S. law”, if a company is too profitable and doesn’t have any competitors, then they are a Monopoly. It is actually illegal. Most businesses experience a very challenging growth period between $1 million and $5 million, mostly because that’s when you have to really start investing in overhead (larger management team, equipment, automation, etc.) if you want to grow. That investment costs money and makes the company less profitable.
When you look closely, the owner’s pay drops to 0 percent at $10 million. That doesn’t imply that an owner doesn’t get to make any money at that point, it’s more of a recognition that the profits at that level end up being a lot of money and the owner can (and maybe should) consider hiring a CEO and promoting themselves to the chairman of the board role instead, where you don’t take a salary and instead just take profit distributions.
Companies need to have enough “cash on hand” or “Retained Earnings” in order to plan for the unexpected and growth. Small companies will pay out bonuses and to the owners (S corporations) dividends to reduce profits and, therefore, reduce taxes.
Public Corporations that have shareholders reduce their taxes by pouring profit dollars into categories such as Stock buy backs, Retained earnings, Raises, Bonuses, Equipment upgrades, Reimbursed Employee Expenses, Improved Health Care Insurance Contributions, Fringe Benefit Programs like 401(k) matching contributions and Group Term Life Insurance and Disability benefits.
Companies can also purchase Fixed Assets and take immediate depreciation before year end to reduce taxable profits. Companies may sponsor charities to reduce taxable profits. Companies may carry over previous year net operating losses called NOLD which is Net Operating Loss Deduction thus reducing their current tax burden. This “NOLD” is why we hear about many large and seemingly profitable companies NOT paying taxes.
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3 Ways a Company Profits are Measured in The United States
To be counted as a successful enterprise, a business — maybe a service company, a retailer, or a manufacturer — needs to generate profits. However, to generate profits, companies must make sales to customers that exceed the amount those sales cost. Note that the three key components of profit are revenue, the cost of sales, and other types of expenses. Companies use this information to compute net income.
1. Revenues, a component of profits
First and foremost, revenues are inflows from customers. They represent the actual amounts that your customers remit to you or, in some cases, promise to give you. The term sale is a synonym for revenue. Revenue comes only when you sell whatever you usually sell to your customers. If you sell a product you normally don’t sell (say, your delivery truck or the naming rights to your building), you record the inflow as a gain or loss rather than as revenue.
Note that a company obviously can’t record revenue until it knows the actual price and feels assured that the customer will pay. For instance, if Michelangelo’s contract requires a team of evaluators to judge a completed work in order to set its price, he can’t record revenue until the actual price is set.
2. Cost of sales, a component of profits
Cost of sales simply refers to the cost of buying or making the products that you sell. Since most companies don’t manufacture the goods themselves, when retailers’ measure cost of sales, they base it on the amount of money they paid to purchase the goods from a supplier.
In the United States, most manufacturers and retailers use the term cost of goods sold instead of cost of sales. This point often confuses individuals, so don’t be alarmed when you see them interchanged. Just know that regardless of the name, these two concepts are largely the same thing.
When buying or making goods, companies tend to record the cost of unsold goods on the balance as inventory — an asset to the company. Then, when the goods are sold, their cost is taken out of inventory and put into cost of sales, which is subtracted from revenue on the income statement.
For instance, let’s imagine you own a convenience store that sold 1,000 bags of chips the previous year. The chips cost you $0.50 per bag, for a total cost of $500, but you sold them for $0.95 per bag, for a total revenue of $950. You can leverage this information to construct the beginning of an income statement (where all revenue and expenses are reported).
3. Operating expenses, a component of profits
Have it in mind that sales don’t just materialize by themselves. To bring in sales, you must pay employees, advertisers, and other marketers, and that’s just the beginning. Typical expenses for a company include the following:
- Selling, general, and administrative expenses: Costs such as sales commissions and managerial salaries needed to generate sales and run the company
- Research and development expense: Costs of finding and advancing innovative technologies needed to create new products
- Interest expense: Costs of borrowing money, which companies must pay to their creditors
- Income tax expense (also known as provision for income taxes): The portion of profits companies are usually required to pay to government authorities
Even though the cost of sales is always an expense, not every expense qualifies as cost of sales. Cost of sales represents the actual cost of producing or buying the item you sell. However, your company may need to pay additional expenses, such as sales commission and advertising, to sell this item.
Note that the distinction between cost of sales and other expenses is important for determining gross profit, the difference between revenue and cost of sales. When calculating gross profit, you deduct cost of sales but not operating or other expenses.
Profits, also called Net Income, are the difference between revenues and all expenses, including cost of sales. Investors and managers often refer to net income because it provides a single bottom-line number to measure a company’s performance.
Note that companies in the United States hardly make too many profits, even if they do, they instead choose to set up their structure to not show the complete amount of profit through holding companies or even dividing into subsidiaries so they overcome the monopoly issue.