Retained Earnings are the accumulated profits that a company has not distributed to its shareholders as dividends, and they are typically reinvested in the company for future growth or used to cover losses.
scroll for more
Starts at $0 + state fees and only takes 5-10 minutes
Last Updated: December 9, 2025
Starting a business comes with a big learning curve, and for many, that learning curve comes with lots of new terms to learn. For some entrepreneurs, the term “retained earnings” is a new concept. Thankfully, this guide will discuss what retained earnings are, how they’re calculated, and more.
“Retained earnings” refers to those earnings that a company still holds after paying shareholder dividends. A small business owner might encounter retained earnings when accounting for income and paying taxes. Only corporations (and LLCs electing to be taxed as corporations) will have retained earnings. For LLCs and partnerships taxed as “pass-through entities,” the business passes its income directly to the owners, rather than paying dividends.
Retained earnings matter in corporate taxation. When a corporation makes a profit, the Board of Directors has a choice. They can distribute the surplus to the shareholders or retain it for the company to use in the next accounting period. When the corporation issues dividends, its shareholders pay a dividend tax on that income. If the corporation chooses to have retained earnings, the income becomes taxable equity at the end of the accounting period.
Retained earnings can be considered deferred dividends or money the company reinvests for long-term shareholder benefit. Like all corporate income, retained earnings are subject to double taxation. First, the corporation will pay corporate income taxes on its revenue. Then, when they receive dividends, the shareholders pay dividend taxes at a rate up to 20% for qualified dividends (and up to 37% for ordinary dividends).
On the other hand, shareholders do not pay taxes on retained earnings because they never receive them. Instead, the IRS generally allows a corporation to retain up to $250,000 without penalty; that money can be used for the reasonable needs of the business. If a corporation retains income “beyond the reasonable needs of the business,” it will owe an accumulated earnings tax of 20%. The average business owner will likely pay a lower tax rate on dividends than the corporate rate on retained earnings.
Retained earnings can act as an indicator of financial strength because the value transfers from previous years. However, shareholders might consider a high amount of retained earnings to signify that the company should pay more dividends. To preserve shareholder loyalty, it’s wise for business owners to pursue profitable growth opportunities. According to the IRS, reasonable retained earnings are backed up by specific, definite, and feasible plans for their use.
Retained earnings can be discussed using multiple terms. Here are a few of the other names for retained earnings:
These various terms all refer to retained earnings, meaning the money returning to the company’s balance sheet for the next accounting period after paying dividends.
Here’s a formula for calculating a company’s potential retained earnings: Retained earnings = Beginning Period Retained Earnings + Net Income (or Loss) − Dividends
Suppose an entrepreneur started their business on January 1, 2020. At first, their earned income would be $0. But suppose the company earned $1,000 during the month of January. On February 1, the owner decided to pay dividends totaling $500. In that context, the company’s retained earnings for February 2020 would have been $500 ($0 + $1,000 – $500 = $500).
Remember that a corporate board member owes a fiduciary duty to the company. They must consider the company’s best interests when deciding whether to maintain retained earnings or pay dividends.
The retained earnings definition represents the revenue reinvested in the business at the end of an accounting period. The corporate board of directors pays a surplus to the shareholders as dividends or keeps the money as retained earnings.
Recommended articles
Corporate law can be complex. ZenBusiness’s library of products and services can help keep even the busiest entrepreneur organized and compliant with legal requirements. ZenBusiness specializes in handling the paperwork so small business owners can focus on what they love: growing their new companies.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. For specific questions about any of these topics, seek the counsel of a licensed professional.
Written by ZenBusiness Editorial Team
The ZenBusiness Editorial Team has more than 20 years of combined small business publishing experience and has helped over 850,000 entrepreneurs launch and grow their companies. The team’s writers and business formation experts are dedicated to providing accurate, practical, and trustworthy guidance so business owners can make confident decisions.
Ready to Start Your Business?
Start Your LLC