What Is an Equity Holder and What Can They Do?
Demystify business ownership. Understand what it means to hold a stake in a company, the nature of that claim, and the influence it grants.
An equity holder is an individual or entity with an ownership stake in a company or asset. This ownership represents a portion of the business itself, distinct from a lender’s claim. Understanding equity holders is fundamental to how businesses are owned and value is distributed.
Understanding Equity Holders
Equity signifies an ownership interest and a residual claim on a company’s assets after all liabilities are satisfied. It reflects the value returned to owners if all assets were liquidated and all debts paid. This is seen on a company’s balance sheet, where equity equals assets minus liabilities.
An equity holder differs from a debt holder, such as a bank or bondholder. Debt holders are lenders whose claims are prioritized in liquidation. Equity holders are owners who bear higher risk but can achieve greater returns if the business thrives. Their claim on assets is residual, paid after creditors are compensated.
Forms of Equity Ownership
Equity holdings manifest in various forms. For corporations, common stock and preferred stock are primary types. Common stock typically grants voting rights and represents a basic ownership interest, fluctuating with company success. Preferred stock often provides enhanced rights, such as priority in dividends or distributions upon liquidation, and usually lacks voting rights.
Other business structures utilize different forms of equity. In partnerships, ownership is defined by partnership interests, outlined in an agreement. For Limited Liability Companies (LLCs), ownership is represented by membership interests. These interests establish ownership, control, and profit-sharing among members.
What Equity Holders Can Do
Equity holders have specific rights. Voting rights allow equity holders to vote on company matters, such as board member elections or major corporate actions. Voting power is generally proportional to the percentage of equity owned.
Equity holders may also possess dividend rights, entitling them to a share of company profits when dividends are declared. Common stock dividends can fluctuate, while preferred stock often has a fixed amount. Pre-emptive rights may allow existing equity holders to purchase new shares to maintain proportional ownership, preventing dilution of their stake.
Upon company liquidation, equity holders hold liquidation rights, granting them a claim on remaining assets after creditors are paid. Preferred equity holders typically have priority in these distributions over common equity holders. These rights define the entitlements and potential returns of an ownership stake.
How to Acquire Equity
Individuals and entities can acquire equity through several methods. Direct purchase involves buying shares or ownership interests. This occurs on public stock exchanges or through private sales.
Another method is a capital contribution, where an individual invests money, assets, or services into a business in exchange for an ownership stake. This is a frequent way to acquire equity in partnerships and LLCs.
Equity can also be acquired as part of an employment package, often as stock options or restricted stock units, which incentivize employees.
Finally, equity can be acquired through inheritance or as a gift. This involves receiving ownership interests from an estate or another individual.