Equity generally represents the total sum of money that will be returned to the shareholders of a company in the event that the company’s assets are liquidated and 100% of all business debts are paid in full.
As shareholder equity has a prominent place on the balance sheet of a company, it is also often used by financial analysts to determine the financial health or the book value of a business.
How Does Shareholder Equity Work?
Shareholder equity “assets-liabilities” equation clearly sets out the state of a company’s finances in ways that can be easily understood by analysts and investors alike. Equity is typically used as a way to raise capital, which a company can then use to invest in assets, projects and operations.
Equity represents the actual value of the stake that an investor has in a business, which is showcased via a proportion of shares. Equity provides stakeholders with opportunities to vote in board of directors elections and the potential to receive dividends or capital gains.
Shareholders have the ability to sell or transfer the shares they hold in a company to others. This is a process that a transfer of equity solicitor should support, because it represents a significant financial decision. As this GOV.UK article explains, submitting specific forms is also required as part of the transfer process, so seeking the support and advice of a legal professional is vital.
Is Shareholder Equity Always Positive?
If a company owns enough assets to cover all its liabilities, its shareholder equity will be positive. However, if a company has more liabilities than assets, shareholder equity will be negative. If shareholder equity continues to be negative for a period of time, this is an example of balance sheet insolvency.