{"id":3769,"date":"2022-06-08T03:02:34","date_gmt":"2022-06-08T02:02:34","guid":{"rendered":"https:\/\/legalvision.co.uk\/?p=3769"},"modified":"2025-07-02T00:41:31","modified_gmt":"2025-07-01T23:41:31","slug":"company-equity","status":"publish","type":"post","link":"https:\/\/legalvision.co.uk\/corporations\/company-equity\/","title":{"rendered":"What is Equity in a Company in England and Wales?"},"content":{"rendered":"\n

If you own shares in a company, you may have come across the term \u201cequity\u201d. But what exactly does it mean? <\/span><\/p>\n\n\n\n

This article will explain what equity generally means in the context of company shareholding. It will provide an introduction to the legal basis for equity, explain how your equity in a company can be valued and explore certain practical considerations.<\/span><\/p>\n\n\n\n

The Meaning of Equity<\/span><\/h2>\n\n\n\n

Equity can be a vague term with different meanings depending on the context. <\/span><\/p>\n\n\n\n

At the most basic level, equity refers to a special form of ownership in an asset that entitles the owner to certain rights. The exact nature of these rights depends on what sort of asset you own. For example, equity interest in a company is quite different from equity interest in a house.\u00a0<\/span><\/p>\n\n\n\n

\n

We can think of equity as a proxy measure of value: it refers to the value of your interest in the property. You can put a price tag on your equity interest in an asset. <\/span><\/p>\n<\/div>\n\n\n\n

In the case of <\/span>owning a company<\/span><\/a>, the value of your equity should roughly equal the value of the company\u2019s shares you hold. <\/span>More specifically, you can calculate the value of your equity by subtracting all of the company\u2019s liabilities from the total assets to its creditors (e.g. banks, suppliers, and certain kinds of \u201cquasi-equity\u201d liabilities like payments owed to preference shareholders). The leftover amount is the company\u2019s \u201cequity\u201d. The value of your share in the equity will then correspond to the percentage of shares you hold.<\/span><\/p>\n\n\n\n

An Example <\/span><\/h3>\n\n\n\n

Suppose you and three other shareholders own a company, WeCo Ltd. Upon its <\/span>incorporation<\/span><\/a>, each of you gave \u00a35,000 to the company in exchange for 100 shares each. <\/span><\/p>\n\n\n\n

Let us say your company has produced its first annual accounts after a year of trading. Your company\u2019s balance sheet states:<\/span><\/p>\n\n\n\n

\u00a3000<\/span><\/td>Current Year<\/b><\/td><\/tr>
Assets<\/b><\/td> <\/td><\/tr>
Current Assets<\/span><\/td>15<\/td><\/tr>
Fixed Assets<\/span><\/td>10<\/td><\/tr>
Other Assets<\/span><\/td>1<\/td><\/tr>
Total Assets<\/b><\/td>26<\/td><\/tr>
Liabilities and owner equity <\/b><\/td> <\/td><\/tr>
Current Liabilities <\/span><\/td>5<\/td><\/tr>
Long-term Liabilities <\/span><\/td>5<\/td><\/tr>
Owner\u2019s Equity<\/b><\/td> <\/td><\/tr>
Investment Capital<\/span><\/td>15<\/td><\/tr>
Accumulated Retained Earnings<\/span><\/td>–<\/td><\/tr>
Total owner\u2019s equity<\/b><\/span><\/td>15<\/td><\/tr>
Total liabilities and owner\u2019s equity <\/b><\/span><\/td>25<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

From a rote accounting perspective, the initial \u00a315,000 the three of you invested in the company constitutes the equity in the company as of the end of the fiscal year. This is as far as your balance sheet is concerned. <\/span><\/p>\n\n\n\n

However, from a more general investment perspective, your equity is worth more than that. If you subtract the value of the current and long-term liabilities (\u00a310,000) from your assets (\u00a326,000), you would have \u00a316,000. \u00a315,000 of this is comprised of share capital, but your business would have an additional \u00a31,000. In effect, the actual value of your equity in the company would be \u00a316,000 divided by each shareholder (\u00a35,333.33). <\/span><\/p>\n\n\n\n

\n

Put another way, if your company manages to grow the total value of the money you have invested in it, the value of your equity will grow in turn. <\/span><\/p>\n<\/div>\n\n\n\n

This is, of course, a simplification. Indeed, you cannot in practice realise this value unless you take certain drastic steps, such as selling your shares in the company or <\/span>winding it up<\/span><\/a>. This is because much of the value lies in the company\u2019s share capital, and the law restricts shareholders\u2019 ability to move this money outside of the company, with few exceptions. <\/span><\/p>\n\n\n\n

The Legal Basis for Equity<\/span><\/h2>\n\n\n\n

Before we explain the importance of share capital, it may be helpful to understand the legal basis of equity. <\/span><\/p>\n\n\n\n

As you may know, a company is its own legal person. At the same time, companies are entities created to make money. The people who create the company give it money to trade with on the basis that they will be entitled to the profit the company produces. <\/span><\/p>\n\n\n\n

Importantly, from a legal perspective, a company\u2019s assets cannot just move freely between its shareholders and the company because that would jeopardise the position of the company\u2019s creditors. Additionally, different shareholders may have different rights in the company\u2019s profits. For instance, one <\/span>class of shareholders<\/span><\/a> may have first rights to the company\u2019s profits ahead of another class. <\/span><\/p>\n\n\n\n

\n

Equity in a company operates on the legal basis that the ordinary shareholders can only benefit from the company\u2019s assets if there is surplus money (profit) left at a certain point. <\/span><\/p>\n<\/div>\n\n\n\n

This decision is a judgment call for the company\u2019s directors to make. Note that directors can be liable if they make an \u201cunlawful distribution\u201d, such as paying a dividend when the company had not made a profit.<\/span><\/p>\n\n\n\n

This differs from lenders, who are entitled to be repaid a fixed amount of money according to the terms of any debt agreement your company has entered into. Lenders also rank ahead of shareholders in the \u201corder of priority\u201d. This refers to the order in which those that have invested money into a company are entitled to be repaid. If they have good reason to believe they will not be repaid, they can take a debt action against your company and ultimately petition for your company to be wound up. <\/span><\/p>\n\n\n\n

Maintaining Your Company\u2019s Share Capital <\/span><\/h3>\n\n\n\n

Taking the above example, your initial investment (plus the other shareholders) of \u00a315,000 constitutes the whole share capital. Calculating this figure is simple enough at this stage, but if your company grows and brings on more investors, the nature of your share capital can change. <\/span><\/p>\n\n\n\n

For instance, not all \u201cshareholders\u201d will hold shares in the company\u2019s share capital. You might issue shares to private equity or venture capital investors that entitles them to a fixed percentage of dividend payments ahead of any dividend payments you make to yourself. These are called \u201c<\/span>preference shares<\/span><\/a>\u201d, and the law does not consider this part of your company\u2019s share capital. <\/span><\/p>\n\n\n\n

What exactly constitutes share capital in your company can become a technical area of law. However, as a general rule of thumb, the company must maintain its share capital. This is because your amount of share capital gives creditors a rough idea of your corresponding assets. <\/span><\/p>\n\n\n\n

The most consequential effect of this rule is that you cannot generally demand your capital back from the company. Rather, you would need to find an investor willing to purchase your shares. There are some exceptions to this, such as certain procedures to reduce your share capital through buy-backs and court sanctions.<\/span><\/p>\n\n\n\n

\n

Therefore, while your equity value may be substantial, it is not easy to simply unlock this value from your company. <\/span><\/p>\n<\/div>\n\n\n\n\n\n Continue reading this article below the form\n <\/i>\n<\/a>\n

\n
\n Need legal advice?\n
\n \n Call 0808 196 8584<\/a> for urgent assistance.\n
\n Otherwise, complete this form, and we will contact you within one business day.\n <\/span>\n <\/div>\n\n \n\n
\n