Buying real estate, investing in the stock market and running your own business might sound like disparate activities, but they all have at least one thing in common -- in each situation, you are an equity holder in an asset. The type of equity ownership you have in a particular asset depends on how the asset is structured. For example, you might be a partner, a shareholder or the sole owner of the asset.
Businesses sometimes raise money to fund growth, research, development and operational costs by selling equity in the company. This might involve a public offering or the private placement of shares of stock in the company. Each share of stock represents an equal level of ownership in the company and grants the shareholder the right to participate in the company's financial fortunes. Shareholders can vote on the members of the board of directors at the company's annual shareholders meeting, but they have no operational control of the company.
While all shareholders are equity holders, not all equity holders are shareholders. Shareholders own shares of stock in a company. If you own a business as a sole proprietorship, there is no stock. You own the whole company, so you hold all the equity. If you and your spouse run a company together, you might structure your business as a partnership. Both of you are equity holders, but there are no shares of stock involved, so you are not shareholders.
A significant difference between shareholders, owners, partners and some other forms of equity ownership involves personal liability. As a shareholder, your risk is limited to your investment. If the company you own stock in goes bankrupt, the most you can lose is 100 percent of your investment. You can't be held liable for the company's debts, and you can't be personally sued. For example, if the company manufactured a defective product that contributed to the death of a customer, you would not be held personally responsible. Other types of equity holders, such as owners and partners, are typically not shielded from such liability.
All equity holders run the risk of loss, and some investments are riskier than others. While it is possible to take on a great deal of risk for very little potential reward, greater opportunities for reward typically require a higher level of risk. Your equity investment might produce a steady stream of regular income through rent payments, royalties or dividends. You also have the potential for tax-advantaged capital appreciation because you don't get taxed on capital assets until you sell them.
- Federal Reserve Bank of San Francisco: What are the Differences Between Debt and Equity Markets?
- Internal Revenue Service: Business Structures
- San Jose State University College of Business: Reporting and Interpreting Owners’ Equity
- Investor.gov: Stocks
- Internal Revenue Service: Election for Husband and Wife Unincorporated Businesses
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