What is Owner's Equity?

Owner's equity represents what would be left for the owners if all assets were sold at book value and all liabilities paid. On the balance sheet, assets equal liabilities plus equity.

What changes equity

Equity increases with:

• Owner contributions of cash or property
• Profit earned by the business

Equity decreases with:

• Owner draws or distributions
• Losses

How it is presented by entity type

• Sole proprietorships: owner's capital, owner contributions and owner draws
• Partnerships and multi-member LLCs: a capital account for each partner
• Corporations: common stock, additional paid-in capital and retained earnings; S corporations also track shareholder distributions

Equity is not cash

A business with large equity may have little cash if profits were reinvested in equipment or inventory. A business with negative equity has liabilities greater than assets, which lenders view as a warning sign.

Tax connection

Equity on the books is related to, but not the same as, an owner's tax basis, which determines whether losses and distributions are taxable. The IRS discusses partner and shareholder basis in Publication 541 and the Form 1120-S instructions. See tax basis.

Common mistakes

Recording owner contributions as revenue or draws as expenses distorts both profit and equity. Monthly bookkeeping keeps them in equity accounts.

Related terms

• Assets: Assets are resources a business owns or controls that are expected to provide future economic benefit.
• Liabilities: Liabilities are amounts a business owes to others, such as suppliers, lenders, employees and tax authorities.
• Retained Earnings: Retained earnings are a corporation's accumulated profits that have not been distributed to shareholders.
• Book Value: Book value is the amount at which an asset or a business is carried on the balance sheet.

Browse more definitions in the small business glossary.