Starting a new business? Get 40% off our accountancy services for 3 months! 😎

x

Equity can be used as a way to look at the financial health of a business, as well as understanding its ownership.
 

What is business equity?

Using equity in a company

In financial terms the word ‘equity’ describes the value of a business once any liabilities are deducted from its assets. The more equity a business has, the more valuable it is.

It’s important to remember though, that a business usually isn’t worth just the equity on the balance sheet. There can be much more value, such as the company’s potential growth, market opportunities, or its customer base and brand loyalty.

What are equities?
In its simplest form, equity means the value of a business. This value is split up amongst shareholders when the company issues shares.

Although the term “equity” relates to the value of a business, “equities” is a word that relates to shares.

 
So, you can own equities in a business and as a result, you’ll own part of the equity of the business.

The equity or ‘value’ of a company can be used as a way to find investment, or even to reward and motivate employees. This is because having equity in a company means that you own part of it – also known as being a shareholder.

Being a shareholder normally means you’re entitled to receive dividend payments from the company’s profits, according to the number and type of shares that you own.

The more profit a company makes, the more funds available for making dividend payments.

 
The more equity you own in the business, the larger your portion of those funds will be.

Shareholders might also have the option of selling their shares for a profit at a later date, although some companies use a special shareholder’s agreement to limit who they can be sold to.
 

Limited company accountancy services

From only £54.50 per month

Learn more

Giving shares to employees

Some companies issue shares to employees as a reward for good performance, or offer them at a special purchase price. This can be very attractive because it enables employees to share in the profits that they help to make.

If the company is still quite young or has lots of potential to grow, then you might even use this as an incentive to recruit talented people. These are broadly known as Employment Related Securities (ERS) schemes, although there are lots of different types to consider.

Selling equity to raise funds

When you own shares in a business, then you own equity and a share of the profits. If the business does well, then the profits grow, and so does the equity value. A limited company which needs to raise money to finance further growth might consider selling equities (shares) in the company.

Known as equity finance, selling shares in order to raise funds for the business is actually fairly common.
You can sell shares to anyone you like, although you do need to be careful about how you describe them. There are strict rules about promoting investments!

Should I sell or give away equity in my company?

Every business is different, so this depends on what you and your company hope to achieve by doing so. Some companies create different types of shares, sometimes known as share classes or ‘alphabet’ shares because of how they’re recorded.

This enables them to issue or create shares whilst controlling what the shareholder is entitled to. For example, giving them a smaller cut of the company’s profits, or removing their right to vote on big company decisions.

Just be aware that share structures can get quite complex, so always take advice if you’re not sure!

Learn more about our online accounting services for businesses. Call 020 3355 4047 to chat to the team, and get an instant online quote.

About The Author

Beth-Anne Bruce

I'm an experienced and fully AAT and ACCA qualified accountant, who is enthusiastic about helping business owners succeed. I also love cooking and needlepoint (at different times!). Learn more about Beth.

More posts by this author
Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments

Read more posts...

March 2024 Client of the Month: Invisible Dragon

This month we spoke to Joe, Managing Director of Invisible Dragon!  Invisible Dragon | Twitter Hey Joe! Tell us about your business I’m…

Read More

Car and Vehicle Expenses for the Self-Employed

There are all sorts of reasons why you’d need a car or work vehicle if you’re self-employed. From tradespeople to healthcare workers,…

Read More

Staff Spotlight: Steve Kennedy, Sales Admin Assistant

This month we spoke to Steve Kennedy, Sales Admin Assistant at The Accountancy Partnership! Give an overview of the duties, functions and…

Read More
Back to Blog...

Confirm Transactions

The number of monthly transactions you have entered based on your turnover seem high. A transaction is one bookkeeping entry such as a sale, purchase, payment or receipt. Are you sure this is correct?

Yes, submit my quote
No, let me change it

Please contact our sales team if you’re unsure

VAT Returns

It is unlikely you will need this service, unless you are voluntarily registered for VAT.

Are you sure this is correct?

Yes, the business is VAT registered
No, let me change it

Call us on 020 3355 4047 if you’re not sure.

Bookkeeping

You will receive our bookkeeping software Pandle for free, as part of your package.

You can use this to complete your own bookkeeping, or we can provide a quote to complete your bookkeeping for you.

Please select and option below:

I will do my own bookkeeping
I want you to do my bookkeeping

Call us on 020 3355 4047 if you’re not sure.