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What Is Equity In Business?

by GBAF mag

So, “what is equity in the business?” is the question most often asked by small business owners. Equity refers to money owed to the corporation by its shareholders; when a company is sold, all or most of the equity is taken off the seller and given to the purchaser. Usually, the purchaser will pay cash and carry the remaining equity.

Equity in business is what the owner is entitled to, just as much as the employee is entitled to. The difference is that the owner gets to keep a portion (usually a large portion) of the company while the employee loses out. Therefore, the owner’s stake in the business can easily exceed his investment in it. If the owner is a smart business person, he’ll use that money wisely and invest it in things that will make his company grow. He won’t simply let it sit there.

But what is equity in the business? Equity is the value you receive from your investment in a company. It is the value you receive minus the value you owe to the business. In other words, your shares of stock certificates represent an interest in the business, and that interest is what is equity in the business.

Dividends are payments received by the owner from the business. Dividends are income on the owner’s part for the year of ownership, unless stated otherwise. If the dividend is paid without any deduction for state and federal taxes, then the owner pays nothing to the government. Similarly, if the dividend is exempt, the owner pays state and federal taxes only.

There are different types of dividends. Regular dividends are paid primarily to increase the owner’s equity. Interests are paid to the government on behalf of the corporation; these are also called pre-tax profits. Government bonds, preferred stocks and foreign stock dividends are other types of dividends. When you buy a stock certificate, it represents an interest in the company.

Many people are unfamiliar with the concept of equity. For most purposes, the difference between equity and debt is easy to spot. Debt is the difference between the value of a company’s stock issued and the net worth of all of the individual securities held by the company. Equity on the other hand refers to the value of a business. Whether an owner has a positive cash flow and therefore is able to pay the rent on time, make the necessary upgrades in order to remain competitive or make new hires, is the basis of whether that business is considered as an equity business or debt business.

Some businesses have no significant assets, while others have many. A company that does not have many assets may still have equity. The value of equity will fluctuate over time based on the value of the company’s assets, liabilities and net worth. An owner could sell all of their shares of stock for one large dividend, but this would represent the worst case scenario for that company. Conversely, they may receive a large profit from selling only a few of their units, allowing them to pay off their debt and be debt free.

For those investors who are considering purchasing stock, but do not understand what is equity in the business? It is very important that a potential buyer understands what he or she is buying and how the company’s assets and liabilities fit together. This means understanding the financial statements of the organization, as well as the balance sheet. When speaking with a prospective stock investor, be sure to let them know what type of entity they are purchasing. It would be disastrous to invest in a small business that does not make money, and that is why the purchase of a block of stock is referred to as an offering. Once an investor knows what they are purchasing and why, they can make better financial decisions with their money.

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