What Is Business Equity?

Equity is your ownership stake in the business — what's left after you subtract everything you owe (liabilities) from everything you own (assets). It's the third section of your Balance Sheet, and it tells you the net worth of the business from the owners' perspective.

The basic equation: Assets minus Liabilities = Equity

What Makes Up Equity

Equity is composed of a few different elements depending on your business structure.

For Sole Proprietors

Component	What it is
Owner's Capital	Money you've put into the business
Owner's Drawings	Money you've taken out (recorded as a reduction)
Net Income	Profit accumulated since inception

For Corporations

Component	What it is
Share Capital (Paid-In Capital)	Money invested by shareholders in exchange for shares
Retained Earnings	Cumulative profit that hasn't been distributed as dividends
Dividends Declared	Reductions in retained earnings when dividends are paid

How Equity Changes Over Time

Equity grows when:

The business earns a profit (net income increases retained earnings)
Owners or shareholders put more money in (capital contributions)

Equity shrinks when:

The business runs at a loss
Owners take money out (drawings or dividends)

At the end of each year, QBO closes the net income into retained earnings — so retained earnings accumulate the history of all the business's profits and losses since inception.

Why Equity Matters

It's your true financial position. A business with $500,000 in assets but $490,000 in liabilities has only $10,000 in equity. A business with $500,000 in assets and $100,000 in liabilities has $400,000 in equity. The asset number alone doesn't tell the story.

Lenders and investors look at it. Banks consider equity when evaluating loan applications — they want to see that owners have meaningful skin in the game. A business with negative equity (liabilities exceeding assets) will have difficulty borrowing.

It tracks what you've built. Retained earnings, accumulated over years of profitable operations, represent the value your business has created and reinvested.

FAQ

Can equity be negative?

Yes — if the business has accumulated losses or the owners have taken out more than the business earned, equity can go negative. This is a warning sign, but not always fatal depending on the business model and growth trajectory.

What's the difference between equity and profit?

Profit is what the business earned in a specific period. Equity is the cumulative total — it includes all past profits and losses, plus capital contributions and distributions. This period's profit adds to equity through retained earnings.

If I have high equity, does that mean I have cash available?

Not necessarily. Equity is an accounting concept — it tells you the net worth on paper, not what's in the bank. A business can have strong equity tied up in physical assets (equipment, inventory) while having very little cash. That's why looking at the Balance Sheet alongside the Cash Flow statement matters.

How is equity different for a sole proprietor vs. a corporation?

Conceptually the same — it's the ownership stake after obligations. Practically different: sole proprietors combine all equity into owner's capital and drawings. Corporations separate it into share capital, retained earnings, and dividends — because there's a legal distinction between the company and its owners.