Schnitte: In the US the purpose of section 183 is to separate hobbies from actual businesses, and it doesn’t apply to C corporations (but does apply to S corps; C corps are what people think of when they generally think of a corporation).
yabob: And the guy who opened the Dodge dealership had every reason in the world to encourage that belief.
As other folks have alluded to, there are plenty of not-for-profit businesses floating around their.
Actually, as a labor lawyer, a lot of my competition are not-for-profit organizations. I’m friendly with them, and we refer cases back and forth, but ultimately they are taking lots of potential clients away from me by offering services for free that I charge people for.
Of course there’s nothing illegal about it.
What we worry about, if it helps, is the appearance that we are pricing at a loss for no reason other than to steal the competitor’s customers. When we are pricing below ‘full cost’ we generally go to our legal team and convince them that we’re not being predatory. If they give the OK, we go ahead with the deal.
Dumping claims (predatory pricing via imports) have been leveled at Japanese steel and Canadian lumber. Anytime you price extremely low and appear to be trying to gain market power by driving out competition with the prices, you may be subject to a lawsuit. While ‘real’ predatory pricing doesn’t seem to exist, the claims and lawsuits do.
Exactly. 3 out of 5 is a rule of thumb, but not a regulation. If you can show to the IRS’s satisfaction that you are running a business, you can take losses as long as they’re happy.
Yes and no. First off, when you talk about costs, you have to differentiate between fixed costs, and variable costs. For instance, if you build widgets and it costs you $1. in material, $1 in labour, $1 in overhead, and $1000 in indirect factory overhead the cost for the widget is $3 + however you allocate indirect factory overhead. Total costs would be:
=3x+1000.
If you think you will make and sell 1000, then the total cost per widget is $4. If you sell for $3.5, you are still selling below cost, but you are still covering the additional cost per product. If you were selling for <$3 it could be considered predatory pricing, and you will go bankrupt after a while, which isn’t good business sense at all. But market penetration is used as well, and it can just cover it’s fixed costs, although if you look at Microsoft’s Xbox, it borders on both.
If you have 50 stores in 12 states selling widgets, you can afford to drop the price of some kinds of widget in 5 of those stores below cost and “carry” the cost of that price drop via slaes in your other 45 stores. I was in the ad department and it was rather obvious in which stores that was happening.
Full disclosure: the chain folded after I left, but not because of lack of profits, its problems were poor merchandising, an extremely unmotivated sales staff and poor location. Home Depot pretty much handed it its head on a plate.
In our signage department someone once suggested that we develop a series of signs which were arrows saying 'Sales Associates This Way" – which led to the break room.
“Democracy” and “capitalism” are two words that are often used egregiously. The Economist often argues for less governmental involvement in business, not just because of taxes and bureaucracy, but also since special interests very much corrupt democracy, which has very different interests. In many ways, America is now a country run by corporations. The Cato Institute likewise seems to promote real capitalism over the pseudo-capitalism that prevents competition between business under the shadow of subsidies, connections and legal loopholes.
People behave in illogical ways, regardless of theories or models or the opinion of some dismal scientists. And one can argue predatory pricing by calling it normal competition or irrational behaviour. This hardly proves its non-existence. It would, however, seem to have less to offer big business than price-fixing, which clearly has been shown to exist (by times) in the oil industry, agribusiness and specialty markets (such as citric acid).
But the anecdotal evidence is fairly compelling, if you talk to people who work for Home Depot, or have lived in a neighbourhood where low priced mom and pop video stores have been displaced by now higher-priced Blockbuster. You could say Blockbuster has much higher prices than other local stores, now that few exist, by citing the normal practice of monopolies or the changing costs of doing business between now and ten years ago. You could ignore the entertainment and political connections of a company like Blockbuster or the fact they lost a recent lawsuit against inflated overdue video prices. But you could see what was happening in your own neighbourhood, quite clearly, regardless of what you call it. Which doesn’t mean it shouldn’t be allowed to happen. Consumers make bad choices all the time, even illogical ones.
I agree; I did not intend to imply otherwise.
But “non-profit” status is just a feature of the tax code. If it did not exist, I believe there would still be (fewer) organizations which did not distribute profits (ie, used all revenues to cover costs).
I have a basic conception of psychology. I believe that people seek pleasure and avoid pain. For most people, money (indirectly) gives pleasure. The few freakazoids prefer “psychic income”, by giving either pain or pleasure to others. Hence, the two examples I provided. Maybe there are other sources of psychic income. I’m not very clever.
Actually, I work for a corporation that is legally not-for-profit. The corporation is owned as an association - it has no shareholders, and thus no party benefits from us turning a “profit.” The “Profits” can only be reinvested in providing more services. So we pay no income tax, even when we make a “profit.”
Are non-profits limited in which fields they can do business? For instance, could some non-profit start selling electronics at or near cost on the Internet?
What matters is not the “field”, but the purpose. Each (US) state has its own rules, but the IRS requires a religious, charitable, educational, literary, or scientific purpose for an organization to qualify for non-profit status. There are many interpretations for this requirement; hire a lawyer.
Except that this assumes it costs almost nothing to open a competing business. Which is true in the industrial sector of say, washing car windows at the stoplight, but not so true in manufacturing cars, for instance. It’s not just the investment in physical equipment and talented staff, but the struggle to let people know about your business and product and get them to try it. (How likely are you to buy a car from a startup company, even if it’s cheaper? How much do you think they’d have to spend on advertising to convince you they’re a real company?)
I get very tired of economists spouting about the wonder of the free market, when they show absolutely no understanding of how many different ways a ‘free market’ can break down.
Hear hear. Henry Ford may have initially charged less for his Model Ts, but this did not last once his early competitors disappeared. Was this because of “predatory pricing” or because by calling this competition or monopoly instead? Because once you have the monopoly, you can justify a lot of things.
Prices for Model Ts fell pretty much consistently from the time of the car’s introduction in 1908 to its retirement in 1927. The exceptions were the WWI years (1918- early 1920) and a dip in 24-25, followed by an increase in 26-27. After that, the Model T was replaced by the Model A. See:
Henry Ford’s experiences serve as an interesting study in the obligations of a for-profit business.
The story is well-known of how Ford abruptly raised the salaries of his factory workers one day. I’ve heard it said he thought it would be good if a person making a Model T could afford to own a Model T.
Regardless of his actual reason, the Dodge Brothers, then major stock holders in his company, sued. They reasoned that as they had invested in the company for purposes of profit, Ford was contractually obligated to them to squeeze as much profit out of the company as he could. In their suit they accused him of having attempted to convert the Ford Motor Co. into a “semi-elymosynary institution”, a phrase I’ve always liked.
The courts disagreed. It was ruled that if Ford failed to seek profits at all, then he was violating his trust to his shareholders. But as Ford was the majority stockholder, he could determine where the profit motive stood in relation to other ambitions he had for the company.