Equities: What you're worth

Equity - or capital - is the "big picture" of why you're working. When you finish your work and close the books, you want to see your equity bigger and better than you started.

In a sole proprietorship or partnership, it's simply seeing the total equity increase. If you're the owner, it's all yours. As a partner, usually there is, or at least, should be a partnership agreement that spells out the terms of which partner gets what portion of the business. Often, a 50/50 split is often difficult, for obvious reasons. Determining how to structure this will take advice from people you can trust and with plenty of experience with partnership relationships.

In the event you decide to incorporate, the equity of the business is represented in shares, or parts of ownership, of the company. A privately held company (as I recall from years ago) consists of 15 shareholders or less. If your goal is to develop your business into a company whose shares are traded on a stock exchange, you will get to the point of watching the value of your shares grow. The profits of a company are sometimes distributed to the shareholders. These distributions are called dividends. Any profits not distributed are referred to as retained earnings. By this point, you, as the owner, will more than likely be an employee. Consequently, the retained earnings aren't as significant for you personally. Instead, they will be important for your shareholders. Although you want to be able to issue dividends to them, you also want to be able to keep a portion of the profits in the company to keep the value of the stock itself high.

When an investor looks at the earnings of a business, he (or she) wants to see a good price-to-earnings ratio. I'm starting to get out of my area of expertise here, but other things an investor wants to see are a good dividend payment and a good return on investment. When a company pays dividends consistently and when it also has growth in its equities, the investor knows there is a good return on investment because the dividends are similar to interest earnings on a bank account and the increase in retained earnings adds to the value of the shares of stock the investor owns.

Grow the value of the business and you and your partners or investors will be happy.

Have a great weekend.

Gary