The terms shareholder and equity holder often refer to the same person. However, there are distinctions between the two. Equity holders include all the parties who hold ownership in a company, including shareholders. While all shareholders are equity holders, not all equity holders are shareholders.
The balance sheet lists a company's assets, liabilities and equity. While assets refer to all the items the business owns and liabilities refer to the business' financial obligations, equity refers to the value of a company. To find a company's equity, deduct its liabilities from its assets. This is what the business still has if it sells all its assets and uses the proceeds to pay for all its financial obligations.
Equity Holder Types
Equity holders refer to the owners of a business. Depending on the structure of the company, these equity holders may have other titles. In a sole proprietorship, whereby one person owns the company, the equity holder is simply known as the owner. In a partnership, whereby more than one person owns the company, the equity holders are known as partners. In a corporation, whereby individuals or institutions gain ownership of the company through the purchase of shares, these individuals or institutions are known as shareholders.
A company may issue two types of shares: preferred shares and common shares. Preferred shareholders usually get a certain amount of dividends per year. The company can choose to express the amount of dividends as a percentage of the par value of the shares or as a fixed amount. Common shareholders don't have a guarantee on the amount of dividends they get, and may or may not get dividends in any one year.
Sources of Equity
A company can get equity from two sources: owner contributions and retained earnings. Owner contributions refer to the amount of money the company's owners invest in the company. For example, the company's owner or partners may put in a certain amount of capital for the company's operations. In a corporation, the shareholders make their contributions when they buy the shares. A company also gets equity from the portion of its net profits that it retains.
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