Retained earnings are the accumulated profits a corporation has kept rather than paid out to shareholders, forming part of shareholders' equity.
Each year, a corporation's net income either goes out to shareholders as dividends or stays in the business. The portion kept accumulates as retained earnings, a component of equity on the balance sheet. Growing retained earnings signal a business building value and funding itself from profit.
Retained earnings inside a corporation have already been taxed at the corporate level, which is only about 12% for small-business income. Leaving profit in the company therefore defers the higher personal tax that arises when it is paid out as dividends, one of the core advantages of incorporating.
A corporation earns $100,000, pays $30,000 in dividends, and keeps $70,000. That $70,000 adds to retained earnings, available to reinvest or to distribute in a future, lower-income year.
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