Types of equity

Owner’s equity represents the ownership interest of the business owner in the business’s assets and is a crucial part of the balance sheet.

Assets, on the other hand, are valuable resources owned by the business that contribute to its financial strength.

Net assets: owner’s stake in the business after all the liabilities have been satisfied

Comparing ownerships

• Retained earnings

  • Sole proprietorship

    • The owner has complete control over the business

    • When the owner wants to take money out of the business, it’s done through owner draws

    • Retained earnings is the accumulated equity at the end of the year — after accounting for all income and withdrawals

  • Partnership

    • Two or more owners join forces, work together, and together they contribute partner equity to build their business.

    • When the owners want to take money out of the business, it’s done through partner’s draws.

• Membership units

  • In an LLC, owners contribute their equity as members of the business, combining flexibility and protection.

  • Members have the option to withdraw funds through distributions, which are payments made from the business’s profits or available cash.

  • The equity within these capital accounts is referred to as membership units or capital interests

  • Membership units represent the member’s ownership interest

• Stockholder equity

  • C Corporation

    • Equity is typically contributed by shareholders in the form of cash, property, or services rendered to the business.

    • When the business issues stocks to shareholders, the funds received are known as common stock, representing a trade where shareholders exchange their capital for ownership in the business, known as shareholder’s equity.

    • To withdraw equity from a C Corporation, shareholders may receive dividends when the business distributes profits to its shareholders

  • S Corporation

    • A special type of corporation with tax advantages

    • It is suitable for businesses with one or more owners, limited to a maximum of one hundred, and all owners must be US citizens

• Net assets

  • Nonprofits are mission-driven organizations that do not have shareholders or owners, but instead are controlled by founders or a board.

  • Since no one owns a nonprofit, there’s no equity

  • Nonprofits received investments and contributions to support their mission, and any withdrawals or transfers of assets must comply with legal requirements.

  • When a nonprofit organization ceases to exist, it is required by law to transfer all remaining assets to another tax-exempt organization or the government.