Small Business 101: What Is 'Equity' in a Company?
As you know, starting and operating a business takes money. And one of the many tough decisions business owners must make is whether that money should come from debt or from equity.
Most people are probably familiar with debt, whether from credit cards, car loans or home mortgages. A business loan is no different: You borrow money in exchange for the promise to repay it under agreed-upon conditions. Loans allow a business owner to maintain complete control over a business, but also require regular payments regardless of how the business is doing; they also often require a business owner to put up personal assets as collateral. That's why some business owners decide to raise business capital by securing equity investments in their company.
But what is equity?
A person who acquires equity acquires an interest in a company. This means that an equity investor becomes a part owner of your business. Along with an ownership stake in a business, equity investors generally also acquire a certain level of control in the business itself. These rights may include:
- Voting rights for major business decisions or in board elections,
- The right to be informed about all significant business decisions, and
- The right to sue to enforce ownership rights.
There are a number of different ways in which a business may be structured to accommodate equity investors. These business structures include general partnerships, limited partnerships, corporations, and limited liability corporations. In some cases, as equity investors come on board, the structure of a business may need to be altered.
In addition to greater flexibility as far as repayment is considered, equity investments may offer several other advantages for business owners seeking capital.
For example, while banks may be hesitant to invest a significant amount of money into a new or unproven business, equity investors may be more willing to take a chance in order to reap huge returns if the business is successful. For that reason, equity investors also tend to be more interested in the success of the business and may be able to offer help, mentoring, or business advice.
Find more legal tips for entrepreneurs and small business owners at FindLaw's section on Starting a Business.
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