When you're talking about a corporation, the terms stockholders' equity and owners' equity mean the same thing. However, you'll only see the term stockholders' equity on the corporation's balance sheet. If you're referencing a sole proprietorship, the proper term is owner's equity, as there are no stockholders. A one-person ownership of a corporation should also be listed as stockholder's equity, since the person owns 100 percent of the stock.
Two primary classes of stock may be involved in stockholders' equity. Common stock, the most prevalent type, is usually the largest class and the most popular type traded on the major stock markets around the world. Preferred stock, the second type, is used by some companies to raise capital, in addition to issuing common stock. Preferred stockholders have a superior claim on corporate assets and dividends, but they seldom have the voting rights of common stockholders.
Along with the cash generated from stock sales, retained earnings is part of stockholders' equity. Retained earnings are the cumulative balance of profits since the beginning of the corporation minus all dividends paid to stockholders. Sole proprietorship profits, called the capital account, minus monies withdrawn by the owner, become part of the owner's equity balance. While both mean the same thing in reality, there is a legal difference because of the company structures and the payment of stockholder dividends.
Whether you're talking about a corporation or sole proprietorship, the calculation for stockholders' or owner's equity is identical. Stockholders' equity or owner's equity equals the value of company assets minus company liabilities. Assets include cash, inventory, furniture, equipment and real estate owned. Liabilities include loans and all payment obligations for which the company is responsible.
Sole Proprietorship Owner's Equity
When accounting for owner's equity for a sole proprietorship, the company's balance sheet items will differ from those of a corporation. Instead of paid-in capital, proceeds from stock sales, retained earnings, accumulated profits minus dividends, and treasury stock -- shares repurchased by the corporation from stockholders -- the sole proprietorship balance sheet will have two or three different accounts. These accounts usually will have names like "John Smith, the owner, capital," "John Smith withdrawals" and "current year net income."
Evaluating a Company
Whether described as stockholders' equity for a corporation or owner's equity for a sole proprietorship, analyzing equity is a critical component for evaluating a company's strength or weakness. You might find companies with negative stockholders' or owner's equity, usually indicating one or more years of net operating losses, instead of net profits. Just because a company has high stockholders' equity, do not automatically assume this is a good investment without further examination. For example, buying stock in these corporations might mean you'll not receive dividends, as the company may focus on building up its stockholders' equity by not paying dividends.
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