this post was submitted on 23 Jun 2023
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No Stupid Questions

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Beyond spez (and the fact that he is a greedy little pig boy), I’m curious about the corporate dynamics that prevent a company like Reddit from being profitable. From an outside perspective, they make hundreds of millions per year via advertising, their product is a relatively simple (compared to industries that need a lot of capital to build their product), and their content is created and moderated for free by users. Could any offer some insights or educated guesses? Additionally, I’m curious how this all ties into the larger culture of Silicon Valley tech companies in the 2010s.

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[–] Aux 51 points 1 year ago (20 children)

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.

[–] SpiralCompass 13 points 1 year ago (5 children)

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.

[–] Aux 2 points 1 year ago (4 children)

You're confusing publicly traded companies with private companies.

[–] Aphridy 5 points 1 year ago (1 children)

Except that private companies have one or more shareholders too. In the end, they want to see a profit.

[–] Aux 0 points 1 year ago
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