What Is Equity in Business? 3 Types of Business Equity

Equity is a measure of a company’s total assets minus total liabilities. In the case of the company’s liquidation, the equity is the amount returned to shareholders after all the assets are sold and all the debts are paid off. Equity is one of the most common ways of determining the book value of a company and the company’s overall financial stability.

If a firm has positive equity, it means that the company’s total asset value is higher than its total liabilities. Negative equity means that the opposite is true. Equity provides essential information for investors since it will influence the price of the company’s stock, affecting the capital gains and dividend payments, and could be a fundamental factor in whether or not to invest.

Use the following formula to calculate a company’s equity:

Equity = Total Assets - Total Liabilities

You can find the information for this metric on the company’s balance sheet, one of the most important financial statements. Balance sheets typically feature itemized listings of assets and debt, including common stock, preferred stock, cash flow, lines of credit, and accounts receivable.

The larger and more complex the company, the more difficult it is to calculate its equity. When a company becomes a well-known brand, its equity will include intangible assets, such as brand recognition, public reputation, and intellectual property.

When calculating a company’s equity, it’s essential to distinguish between its book value and its market value. The book value of equity is the payout to all shareholders in the case of a liquidation. However, the market value adds other factors, such as projected growth, and is often more significant than the book value. Calculating the market value is a simple equation: the current share price multiplied by the number of outstanding shares.

Owner’s equity and shareholders’ equity are essentially the same thing; which term you use depends on the type of company.

• Shareholders’ equity: This type of equity is also known as stockholders’ equity and refers to the shares of stocks owned by the company’s investors or shareholders. This includes retained earnings, which are profits that have been saved, rather than paid out to shareholders as dividends. Shareholders’ total equity is essentially the company’s net worth since it’s the value that would be due to all the investors in the case of a liquidation.
• Owner’s equity: If a company is a privately owned sole proprietorship, that company’s form of equity is known as owner’s equity. Financial analysts use the owner’s equity calculation to determine the company’s valuation. (This shouldn’t be confused with ownership equity, the amount of equity in a company left after all its debts have been paid.)

Private equity is an asset class, or grouping of investments, used to invest in a business with growth potential. Private equity firms pool money from investors and other firms to buy, improve, and potentially sell private companies that are not listed on the stock market. Investing in private equity is often only available to accredited investors. Still, more ordinary investors, especially those interested in diversification, can invest in a company’s equity through exchange-traded funds (ETFs), often publicly available through brokerages.

Equity financing is a way for a new company or small business to raise money. A small business or start-up, funded by the business owner’s savings, has equity, even if it hasn’t issued any shares on the stock market. This equity takes the form of the company’s assets—including equipment and how much money is in your business’s bank accounts, minus whatever is owed.

Small businesses and start-ups will likely need access to capital but may not borrow in sufficient amounts to raise the necessary funds. Equity investment is a way to raise money if borrowing—also known as debt financing—isn't an option. With equity investment, investors—either angel investors or venture capital—can take a long-term ownership stake in the company in return for funding. These investors become equity investors with rights and privileges, often including a seat on the board of directors.

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