What is equity in business?

Published Thursday 23 July 2026

Table of contents

• What is equity?
• Types of equity
• How to calculate equity in business
• Equity vs owner's equity vs net worth
• Equity financing vs debt financing
• Why equity matters
• How equity changes
• Where equity is recorded and how it's reported
• What is negative equity?
• How to build equity in your business
• Track your business equity with Xero
• FAQs on equity

Key takeaways

• Equity is the value left in your business after you subtract everything you owe from everything you own. It's calculated as assets minus liabilities.
• Your equity figure tells lenders, investors and potential buyers how financially healthy your business is, and it changes every time you make a profit, take a loss or draw money out.
• You'll find equity on your balance sheet, and keeping it positive helps you meet certain UK legal requirements and puts you in a stronger position when securing funding.
• Regularly tracking equity helps you make informed decisions about growth, borrowing and long-term planning.

What is equity?

Equity is the portion of your business that you actually own. In simple terms, it's what's left over once you take away everything you owe (your liabilities) from everything you own (your assets).

The basic equity definition is: equity = assets - liabilities. If your business has assets worth £200,000 and liabilities of £80,000, your equity is £120,000. That figure represents the true value belonging to the business owner or shareholders.

For small business owners, understanding what equity is helps you see the bigger picture of your finances beyond day-to-day cash flow.

Types of equity

The word "equity" appears in several different contexts. Here are the main types you're likely to come across as a business owner.

Shareholder equity

Shareholder equity is the total value that belongs to a company's shareholders. It includes share capital (the money invested when shares were issued) and retained earnings (profits that have been kept in the business rather than paid out as dividends). This is the type most often discussed in company accounts.

Owner's equity

Owner's equity works the same way as shareholder equity but applies to sole traders and partnerships rather than limited companies. It represents the owner's personal stake in the business after all debts are accounted for.

Home equity

Home equity is the difference between your property's current market value and the amount you still owe on your mortgage. While it's a personal finance term, many small business owners use property as collateral for business loans, so it's worth understanding.

Brand equity

Brand equity refers to the commercial value that comes from how customers perceive your brand. A strong reputation can let you charge higher prices and attract loyal customers, even if it doesn't appear as a line item on your balance sheet.

Private equity

Private equity involves investment funds that buy stakes in private companies. These investors typically look for businesses they can grow and sell at a profit. It's less common for very small businesses but becomes relevant as you scale.

How to calculate equity in business

Calculating equity in your business is straightforward. You use the formula: equity = total assets - total liabilities.

Here's how that works in practice. Say your UK-based consultancy has the following finances:

• Cash in the bank: £30,000
• Outstanding invoices owed to you: £15,000
• Office equipment and furniture: £10,000
• Company vehicle: £12,000

Your total assets come to £67,000. Now subtract your liabilities:

• Business loan balance: £20,000
• Unpaid supplier invoices: £7,000
• Credit card balance: £3,000

Your total liabilities are £30,000. So your equity is £67,000 - £30,000 = £37,000. That's the value you'd theoretically walk away with if you sold everything and paid off all your debts.

Equity vs owner's equity vs net worth

You'll often see these 3 terms used interchangeably, and for most small businesses, they mean the same thing. They all describe what's left after liabilities are subtracted from assets.

The difference is mostly about context. "Shareholder equity" tends to appear in limited company accounts. "Owner's equity" is common for sole traders and partnerships. "Net worth" is used more broadly in everyday conversation and personal finance. Whichever term you use, the calculation is the same.

Equity financing vs debt financing

When your business needs funding, you generally have 2 options: equity financing or debt financing. Each comes with trade-offs.

With equity financing, you sell a share of your business to an investor in exchange for capital. You don't have to repay the money, but you give up a portion of ownership and future profits. This can be a good fit if you want to avoid monthly repayments and are comfortable sharing decision-making.

Debt financing means borrowing money, typically through a bank loan or line of credit, and repaying it with interest over time. You keep full ownership, but you take on a liability that must be paid regardless of how the business performs.

Many UK small businesses use a combination of both, depending on their growth stage and appetite for risk.

Why equity matters

Equity isn't just an accounting number. It has real implications for how you run and grow your business.

• Selling your business: a buyer will look at your equity to assess what your business is worth
• Borrowing: lenders use equity to judge your financial health before approving loans or credit
• Attracting investment: investors want to see positive and growing equity as a sign of a viable business
• Insurance and valuations: accurate equity figures help you insure your business appropriately and plan for the future
• Personal confidence: knowing your equity gives you a clearer picture of where your business stands, so you can make decisions with more certainty

How equity changes

Your equity isn't a fixed number. It moves up and down as your business operates. Understanding what drives those changes helps you stay in control.

Things that increase equity:

• earning profits that are retained in the business
• owners or shareholders investing additional capital
• assets increasing in value, such as property or equipment

Things that decrease equity:

• running at a loss over a period
• drawing money out of the business for personal use
• paying dividends to shareholders
• assets losing value through depreciation or write-offs

Where equity is recorded and how it's reported

Equity sits on your balance sheet, which is 1 of the 3 core financial statements every business should produce. The balance sheet shows your assets, liabilities and equity at a specific point in time.

For limited companies, equity typically includes share capital, retained earnings and any reserves. Sole traders will see a simpler version with owner's capital and drawings.

If your company follows International Financial Reporting Standards (IFRS), you may also prepare a statement of changes in equity. This document tracks how equity has moved during the reporting period, covering items like profit or loss, dividends paid and new shares issued. Even if IFRS doesn't apply to your business, reviewing how your equity has changed over time is a useful exercise.

What is negative equity?

Negative equity means your liabilities exceed your assets. In other words, your business owes more than it owns. This can happen after sustained losses, heavy borrowing or a sharp drop in asset values.

For UK businesses, negative equity is a serious warning sign. It can make it difficult to secure new finance, and it may put you at risk of breaching legal obligations. Under the Insolvency Act 1986, Section 214, directors of limited companies can be held personally liable for wrongful trading if they allow a business to continue operating when they know (or should know) there's no reasonable prospect of avoiding insolvency.

If your equity turns negative, it's worth speaking to an accountant or insolvency practitioner promptly. Early action gives you more options.

How to build equity in your business

Growing your equity strengthens your financial position and opens up opportunities. Here are some practical steps you can take.

1. Increase profitability: review your pricing, reduce unnecessary costs and focus on your most profitable products or services. Every pound of retained profit adds directly to your equity.
2. Reinvest in the business: rather than drawing out all your profits, reinvest a portion into assets that generate returns, whether that's equipment, training or marketing.
3. Reduce liabilities: pay down loans and credit balances where possible. Lowering what you owe increases equity even if your assets stay the same.
4. Manage cash flow tightly: late payments from customers can force you into debt. Using tools like Xero's online invoicing helps you stay on top of what's owed to you.
5. Track your numbers regularly: checking your balance sheet monthly, rather than once a year, means you can spot problems early and act before they erode your equity.

Track your business equity with Xero

Keeping an eye on your equity doesn't have to be complicated. Xero's reporting and analytics tools give you a clear view of your balance sheet, so you can check your assets, liabilities and equity whenever you need to. That can mean fewer surprises and help you make more confident financial decisions. Get one month free.

FAQs on equity

Here are some common questions about equity in a business context.

What is equity in simple terms?

Equity is the value of your ownership stake in a business. It's what you'd be left with if you sold all your assets and paid off all your debts.

What's the difference between equity and shares?

Shares represent units of ownership in a limited company, while equity is the total financial value of that ownership. You can think of shares as slices of the pie and equity as the value of the whole pie belonging to shareholders.

How often should you calculate equity?

It's a good idea to check your equity at least monthly when you review your balance sheet. More frequent checks help you spot trends and respond to changes quickly.

Can equity be negative?

Yes. Negative equity means your business owes more than it owns. This can happen after prolonged losses or heavy borrowing, and it may carry legal implications for company directors under UK insolvency law.

How can you increase business equity?

The most direct ways are to grow your profits and retain them in the business, reduce your debts and avoid unnecessary owner drawings. Consistent reinvestment over time is what builds lasting equity.