Legal Definitions - earnings and profits

Definition: Earnings and profits refer to a corporation's economic capacity to make a shareholderdistribution that is not a return of capital. In other words, it is the measure of a corporation's ability to pay dividends to its shareholders.

Example: If a corporation has $100,000 in earnings and profits, it can distribute up to $100,000 in dividends to its shareholders without dipping into its capital reserves.

Explanation: This means that the corporation has generated profits that can be distributed to shareholders as dividends. The earnings and profits are calculated by subtracting the corporation's expenses from its revenue. If the resulting amount is positive, it is considered earnings and profits. This money can be used to pay dividends to shareholders, which is a way for them to earn a return on their investment in the corporation.