Can you run a business selling things for at or below cost, with no profit motive? Just pulling any necessary operating costs out of personal savings, for instance.
How about if you did this and your lower prices undercut your competitors and made them leave the market?
As an officer of a company you are required to act in the best interest of the shareholders. If you are the only shareholder, well, you can pretty much do whatever the hell you want.
There are laws against predatory pricing. You may not price below your cost in order to drive competition out of the market. It can be a tricky thing to prove in court, but it is illegal.
There may be laws against predatory pricing, but it happens every dya. I used to work for a regional home center chains and believe me, if they were getting competition from a home center in Baton Rouge, La., they’d sell their 2x4s below cost to drive the Baton Rouge competitor out while maintaining higher prices all the time. It was a ROUTINE thing for them to do.
With no profit motive? I think the rule of thumb is, if you don’t make any money for five years, the IRS’ll consider it a hobby. No cites, just what I recall in the hazy mists of my memory.
I’m with GMRyujin here. Don’t know jack about the US, though - but IIRC it’s two years in Germany, and the general principle kinda figures.
IANATaxGuy, but I think this applies to individuals who fill out a 1040 Schedule C for business income and take deductions for losses. I believe the rule is that you have to show a profit for three of every five years or you aren’t allowed to deduct losses. You can still have losses, you just can’t file Schedule C and deduct them, so there’s nothing in this rule that says you can’t give your stuff away.
I don’t think this applies to corporations. There are a lot of corporations that run at a loss (on paper) and a lot of corporations like S-Corps are run at break-even because they distribute all earnings to the shareholders and don’t retain any profit. Thinking back to the dot-com era a few years ago, there were a lot of companies that ran at a loss for several years, in many cases giving away their “product” for free with no viable source of revenue whatsoever in their business plan. This was usually done to gain market share and eliminate competition, and the trick was to have enough investment capital to ride out the years without revenue so you could establish a market and then start to charge. This seems to be exactly what the OP is describing.
I can think of two reasons for doing this:
There are many organizations in category #2, which make only enough to cover their costs.
gscotb:
I must demand a cite, of any kind, backing up your assertion that there are “many organizations in category #2, which make only enough to cover their costs.”
I really don’t think there are many organizations that aren’t chartered as “non-profit” that INTENTIONALLY make just enough to cover their costs.
I would be fascinated, however, were you to prove me wrong.
Yes. But… as mentioned some states have laws regarding predatory pricing. You would have to look into other things as well, because the answer depends on what type of business you’re thinking of. The tax laws are different for corporations, S-corps., etc.
Sure. Look at Wal-mart.
I’m interested in what made the OP think that someone could NOT start a business and intentionally not make money? I’m also interested in what exactly constitutes “predatory pricing” and what exactly is illegal as “predatory priciing activity.”
Also, folks above have been generally correct about the tax issue, which is under section 183 of the Code if anyone’s interested. The general rule is that an individual or S corporation can’t deduct losses incurred from engaging in a hobby; a taxpayer can only deduct business losses and such if they are engaging in an actual business, i.e., trying to make a profit.
There are some amusing (in a sad way) cases under that section where the IRS said that the “business” the hapless taxpayer was engaged in had such a slim chance for profit that there’s no way the taxpayer could have thought he would make one. Some of these cases involved pyramid schemes and work from home deals and the like.
To expand a bit: the tax law says nothing about what a business can and can’t do. Section 183 says only that if you aren’t acting like a business (i.e., trying to make a profit) then you can’t take deductions like a business.
Also, I think several people are confused about the utility of undercutting competitors. Classic economic theory would dictate that there’s no long-term advantage to doing so; i.e., you won’t make money by coming into a market and undercutting the competition until they die, then raising prices. You hear lots of apocryphal stories of Walmart doing this, but realize it’s mostly BS.
TaxGuy – ‘Classic economic theory’ is based on a whole lot of assumptions that may or may not be true in practice. Such as zero or very low costs to start a new business, a perfectly efficient market, etc.
Now a more sophisiticated economic argument may show that real world conditions are usually wrong for undercutting to be a good strategy, but I fail to see a theoretical economics argument – relevant to the range of real world situations – that shows it is always a bad move.
The theoretical argument goes like this: as soon as you raise prices, someone else will open a business and charge less than you are charging, thus siphoning off your customers, causing you to lower prices. Thus the business will never reach the “golden age” of being able to charge whatever it wants with all competition dead.
TaxGuy, you would like this article from the Cato Institue titled The Myth of Predatory Pricing They elaborate on the idea that PP is not real, or at least, has not been proven to have actually happened in business on any real scale. It is illegal, and antitrust laws are, in part, based on the idea, though actual PP events are not easy to come by.
My current job is in pricing, and we take the whole issue of predatory pricing seriously. We don’t ever actually try and destroy our competition by lowering prices below cost and making them bankrupt. However, the threat of litigation is real, and THAT is what we worry about.
The ability to raise prices is not the sole goal of undercutting and eliminating competition. Large distributors (e.g. Wal-mart) often set prices well below their local competition, and they are able to do this based on the volume of products they move, the fact that they can force lower prices from their vendors, lower overhead due to highly automated distribution channels, etc. They drive out competitors to increase their market share, not to gain the freedom to raise prices.
This doesn’t strictly address the OP because AFAIK Wal-mart is not selling below their cost and losing money. The point is that they can often sell below the competition’s cost and still have a healthy margin.
IANATaxGuy either. My understanding is that you have to demonstrate a profit motive to the IRS (if they ask). Turning a profit 3 years out of 5 is the quick way to prove a profit motive. Just because a business runs at a loss 5 years straight does not mean that the IRS automatically classifies it as a hobby.
The business issue is, of course, that trying to make money is a long way from turning a profit.
I can’t believe this…there are so many companies making losses all the time, year after year (for Germany, take Premiere* as an example 
). AFAIK amazon.com hasn’t made a single penny of profit in its existence.
[sub]*: Premiere: Tremendously successless German pay TV channel[/sub]
Cool, thanks for the link.
Could you provide a one or two sentence definition of the kind of predatory pricing activity that would be illegal? I imagine that simply checking your competitors’ prices before setting your own prices isn’t illegal, but what is? It would also seem weird if the definition required a subject intent to drive the competitor out of business. I guess the problem is that I’m trying to think of a way to define predatory pricing objectively and coming up short.
Predatory pricing seems to be corporate law applying to cases where there is an anti-trust issue, at least that is the intent. Can it still be applied to a case of personal vendetta?
The small town I grew up in wasn’t particularly affluent, but there were a few rich families about - old oil money, essentially. One of that number got in a huge fight with the largest local car dealer, and basically wound up hating his guts. Some time later, he opened a new Dodge dealership, with a lot of fanfare, including negative advertising aimed at the other guy’s business. Rumors persisted that he was deliberately operating his Dodge dealership at a loss just to screw the dealer he’d had a fight with. I suppose it would be next to impossible to prove, but I’ve always been curious about the legal implications of cases like that, if it was true.