The legal structure of a business has many impacts on company ownership and management. A corporation is a type of business that grants stock to investors, who become the owners of the business and elect executive board members, who are tasked with appointing high-level managers like the chief executive officer and guiding the company toward meeting its goals. If a corporation's net income is negative over the course of a year, it can have numerous negative effects on the company.
Accumulation of Debt
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Net income or profit is the total amount of money that a business makes after paying for all of its expenses, such as the cost of labor, production, rent, insurance and taxes. When a business has a negative income, it means that its costs are greater than its total revenue, so it loses money over time. Prolonged periods of negative income can deplete the cash that company has on hand and may eventually lead to the accumulation of debt.
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Corporate Taxes
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Corporations are different from other types of businesses like sole proprietorships partnerships and limited liability companies in that corporations are considered distinct tax entities separate from the owners. Instead of passing profits on to the personal income tax returns of owners, corporations pay income taxes directly to the Internal Revenue Service. If a corporation has negative net income, it has no profit that the IRS can tax. Even if a corporation is not subject to income taxes due to zero profit, it may still have to pay other types of taxes related to its operations, such as labor-related taxes and excise taxes.
Stock Prices
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Corporations can choose to sell shares of stock to the public through stock exchanges. Corporations that offer shares to the general public are called publicly traded companies, and their share prices fluctuate based on market demand for their stock. Financial data released by corporations can influence stock prices. If a corporation has negative income, it is a sign to investors that the company is performing poorly, which can decrease demand and cause share prices to fall.
Corporate Bankruptcy
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If a corporation has negative income for a pronged period and accumulates a large amount of debt, it can potentially lead to corporate bankruptcy. Bankruptcy is a process in which a company either dissolves and sells off its assets to pay back its creditors or reorganizes under the supervision of a court in an attempt to increase profitability. If a corporation enters bankruptcy, the shareholders may not receive any money for their investment because creditors and bondholders are paid off before stockholders.
