Business equity: Definition, examples and how to calculate

Business equity is more than just a line on your balance sheet. It actually reflects the true value of what you’ve built. After subtracting debts and liabilities, what’s left is your stake in the business—the result of your investments, hard work and reinvested profits.

Understanding how equity works gives you a clearer view of your business’s financial health. It helps you make more informed decisions, whether you’re planning for growth, setting your own paycheck or mapping out the future. From tracking profitability to securing financing or planning for succession, knowing your equity puts you in a stronger position to make the right calls for your business.

What you’ll learn:

• Business equity is what’s left of your business’s value after you subtract everything it owes from everything it owns.

• You can calculate your business’s equity using the basic formula: Assets − Liabilities.

• There are a few key components that shape your business’s equity over time, including retained earnings and treasury stock.

• Some simple strategies to increase your business equity and build long-term financial strength include boosting profits, reinvesting what you earn and paying down debt.

Business equity represents the ownership value you hold in your company. Simply put, it’s what’s left after subtracting your business’s liabilities from its assets. Think of it like this: If you sold everything your business owns and paid off all the debts, the amount remaining would be your business equity.

Equity can look a bit different depending on how your business is set up.

• Sole proprietorship: Equity represents the owner’s personal share in the business.

• Partnership: Equity is the share each partner owns based on what they contribute and agree on.

• Corporation: Equity is divided into shares of stock owned by shareholders.

Equity matters because it shows how much of your business you truly own. It plays a key role in financing, valuing your company and planning for the future. Lenders often check your equity to see how financially stable your business is, and investors look at it to understand how much value you’ve built over time. Keeping a close eye on your equity can give you a clearer picture of how your business is growing and how the decisions you make today can impact its future value.

Business equity is made up of a few key components that together show your overall ownership in the company. Understanding how these work—like what you see on your balance sheet—can help you get a better idea of how your equity might grow or change over time.

Owner’s equity refers to the capital the owner or owners have invested in the business. In a sole proprietorship or partnership, this is the amount they’ve put in to start the business and keep it running. It represents their personal ownership in the company and can grow when the business makes a profit or when they contribute additional capital.

You’ll typically see owner’s equity in sole proprietorships and partnerships, where equity is tracked through the owners’ or partners’ capital accounts. This is opposed to a corporation, where equity is measured in corporate stock.

Retained earnings are the amount of your business’s net income you keep in the company instead of paying out as dividends or distributions. That money gets reinvested—whether it’s to help the business grow, pay off debt or build a stronger financial foundation. Over time, retained earnings can make a big difference in boosting a company’s overall equity.

You’ll usually see retained earnings tracked on the balance sheet in corporations since they formally record it as part of their equity.

APIC is the extra amount shareholders or owners put into the business above the stock’s par value. You’ll mostly see this in corporations that raise money by issuing shares. When someone buys stock for more than its nominal value, that extra amount is recorded as APIC, which adds to the company’s overall equity.

This type of equity is specific to corporations since they issue stock and formally track contributions above par value.

Treasury stock consists of shares your company has bought back from its shareholders. When you repurchase these shares, they lower the equity shown on your balance sheet. Businesses buy back stock for a few reasons—like boosting shareholder value or holding onto shares for employee compensation plans.

You’ll usually see treasury stock with corporations since they’re the ones that issue and repurchase stock.

When a business brings in strong cash flow, it might decide to share some of those profits with its owners or shareholders. These payouts—called dividends or distributions, depending on the business type—are a way to share a portion of the company’s profits. While they reduce retained earnings (and overall equity), they give owners a way to take profits out of the company. Deciding whether to pay out profits or keep them in the business is a key part of managing equity.

In general, dividends apply to corporations, while distributions are more common in partnerships and sole proprietorships. Ultimately, each payout reduces equity in its own unique way.

Calculating your business equity is a straightforward process. Just subtract everything your business owes (liabilities) from everything it owns (assets). Here’s the basic formula:

Equity = Assets − Liabilities

Your assets will include:

• Cash

• Equipment

• Inventory

• Accounts receivable

Your liabilities will typically include debts like:

• Loans

• Accounts payable

• Other financial obligations

Calculating your business’s equity will show you how much of your business’s value you truly own and give you a clear snapshot of your financial position.

The balance sheet shows how a business’s assets are financed—by debt or equity. Together, liabilities and equity explain how the company pays for everything it owns.

Suppose you started a small landscaping company with $40,000 of your personal savings. Over the year, the business earned $25,000 in profit, which you decided to keep in the business. You also took out a $32,000 loan to buy equipment.

Let’s break it down:

Assets:

• Cash: $65,000

• Equipment: $32,000

Total assets = $97,000

Liabilities:

• Loan payable: $32,000 

Now plug those numbers into the equity formula:

$97,000 − $32,000 = $65,000

That means your equity—the portion of the business you truly own—is $65,000. Your balance sheet would look like this:

Balance sheet (as of year-end)

Now let’s say you and two partners launch a landscaping business. You contribute $25,000, your second partner puts in $20,000, and a third partner later adds $15,000 to help fund expansion—bringing total partner contributions to $60,000.

Over the year, the business earns $25,000 in profit. You and your partners decide to reinvest $17,000 of that profit into the business. The company also repurchases $5,000 worth of its own stock and takes out a $35,000 loan to purchase new equipment.

Here’s how that adds up:

Assets:

• Cash: $72,000 

• Equipment: $35,000

Total assets = $107,000

Liabilities:

• Loan payable: $35,000

Plugging these numbers into the equity formula gives us:

$107,000 − $35,000 = $72,000

Even with a stock buyback, the business still has solid equity—$72,000—thanks to the owners’ contributions and the profits they’ve kept in the company. Keeping those earnings in the business helps boost its value. While moves like buying back shares or taking out a loan for equipment might feel routine, they actually shape the bigger financial picture.

All these everyday decisions add up, showing how the choices you make today can support your business’s long-term health and grow its overall equity. Here’s what your balance sheet might look like in this situation:

Balance sheet (as of year-end)

Growing your business’s equity is a smart way to build wealth and improve your financial stability. Whether you’re looking to attract investors or get a loan, having more equity puts your business in a stronger position for long-term success. 

Here are a few ways you can start boosting your business’s equity right now.

• Increase profitability. One of the simplest ways to grow your equity is by making your business more profitable. That means bringing in more revenue while keeping expenses in check. The more profit your business makes and keeps in the company, the more you build up retained earnings, which are a big part of your equity. Over time, strong profits help your business grow in value and stay financially solid.

• Pay down debt. The less debt your business has, the stronger your equity position. Paying off what you owe—especially high-interest loans—can make a big difference on your balance sheet and free up more cash for growth.

• Reinvest earnings. Putting profits back into the business—whether it goes into marketing, new products or better technology—can help you grow without needing outside investors. That means you can build value and stay in full control of your business at the same time.

Understanding equity gives you a clearer picture of what your business is truly worth. It’s not just about what you own, but it’s also the choices you make, like reinvesting profits, paying down debt or how you split ownership. A strong equity position can make it easier to get funding, fuel growth and set your business up for long-term success.

If you’re focused on making smart financial moves that strengthen your business, start by comparing business cards from Capital One—and see what you’re pre-approved for before you apply, with no impact on your credit.