Equity: Non-Corporate Equity 🏪
The Story of Ownership Without Corporations
Imagine you have a lemonade stand. It’s YOUR stand. Every penny it makes belongs to YOU. Every problem it has? That’s yours too. This is the simplest form of business ownership—and it’s been around for thousands of years!
Let’s explore the world of non-corporate equity—business ownership for regular people, not big companies.
🍋 Sole Proprietorship Equity: The One-Person Show
What Is It?
A sole proprietorship is when ONE person owns the entire business. No partners. No shareholders. Just you and your dream.
Think of it like this: You bake cookies and sell them at the farmer’s market. YOU are the business. The business is YOU.
The Owner’s Equity Equation
Owner's Equity = Business Assets - Business Liabilities
Simple Example:
| What You Have | Amount |
|---|---|
| Cash in register | $500 |
| Cookie supplies | $300 |
| Baking equipment | $700 |
| Total Assets | $1,500 |
| What You Owe | Amount |
|---|---|
| Flour supplier bill | $200 |
| Total Liabilities | $200 |
Your Owner’s Equity = $1,500 - $200 = $1,300
This $1,300 is YOUR piece of the pie. It’s what you truly own!
Money In and Money Out
graph TD A[Owner's Equity] --> B["Increases With"] A --> C["Decreases With"] B --> D["Owner Investments"] B --> E["Business Profits"] C --> F["Owner Withdrawals"] C --> G["Business Losses"]
Owner Investments (Capital): When you put your own money INTO the business.
Example: You add $1,000 from your savings to buy a new oven.
Owner Withdrawals (Drawings): When you take money OUT for personal use.
Example: You take $300 to pay your phone bill.
The Capital Account Journey
Your capital account tracks your ownership over time:
| Date | Description | Amount | Balance |
|---|---|---|---|
| Jan 1 | Starting Investment | +$5,000 | $5,000 |
| Jan 15 | Add more cash | +$500 | $5,500 |
| Jan 31 | Monthly profit | +$800 | $6,300 |
| Feb 1 | Personal withdrawal | -$400 | $5,900 |
Key Insight: Your capital account grows when business does well and shrinks when you take money out!
Why Choose Sole Proprietorship?
âś… Simple to start - No paperwork headaches âś… You keep ALL profits - No sharing required âś… You make ALL decisions - Total freedom
⚠️ The catch: You’re personally responsible for EVERYTHING, including debts!
🤝 Partnership Accounting: Sharing the Dream
What Is a Partnership?
A partnership is when TWO or MORE people own a business together. They share the work, the money, and the responsibility.
Think of it like this: You and your best friend decide to sell lemonade together. One of you makes the lemonade. One of you takes the money. You BOTH own the stand.
The Partnership Equation
Total Partnership Equity = Partner A's Capital + Partner B's Capital + ...
Setting Up Partner Capital Accounts
Each partner gets their own capital account—like a personal scoreboard showing what they’ve put in and taken out.
Example: The Friendly Bakery Partnership
Maya and Leo start a bakery together:
| Partner | Initial Investment |
|---|---|
| Maya | $20,000 cash |
| Leo | $15,000 cash + $5,000 oven |
Maya’s Capital Account: $20,000 Leo’s Capital Account: $20,000 Total Partnership Equity: $40,000
Partner Contributions Don’t Have to Be Cash!
Partners can invest:
- đź’µ Cash - Actual money
- 🏠Property - Equipment, vehicles, buildings
- đź’ˇ Skills - Special expertise (sometimes)
Example: Leo brought an oven worth $5,000. That counts as his investment!
Partner Withdrawals (Drawings)
Just like sole proprietors, partners can take money out for personal use. But now we track EACH partner separately!
graph TD A["Partnership"] --> B["Maya's Capital] A --> C[Leo's Capital"] B --> D["Maya's Investments] B --> E[Maya's Drawings"] C --> F["Leo's Investments] C --> G[Leo's Drawings"]
đź’° Partnership Profit Sharing: Dividing the Pie
The Big Question: Who Gets What?
When the partnership makes money, how do you split it? There are MANY ways!
Method 1: Equal Split
The simplest approach—divide everything equally.
Example: Partnership profit = $12,000 Partners: Maya and Leo
| Partner | Share | Amount |
|---|---|---|
| Maya | 50% | $6,000 |
| Leo | 50% | $6,000 |
Easy peasy!
Method 2: Agreed Ratio
Partners decide in advance how to split profits.
Example: Maya did more of the initial work setting up the bakery. They agree:
- Maya gets 60%
- Leo gets 40%
Profit = $10,000
| Partner | Ratio | Amount |
|---|---|---|
| Maya | 60% | $6,000 |
| Leo | 40% | $4,000 |
Method 3: Capital Ratio
Split profits based on how much each partner invested.
Example:
| Partner | Capital | Ratio | Profit ($15,000) |
|---|---|---|---|
| Maya | $20,000 | 50% | $7,500 |
| Leo | $20,000 | 50% | $7,500 |
If they had different capital amounts, the split would be different!
Method 4: Salaries + Remainder Split
Some partners work more hours or have special skills. They get a “salary” first, then split what’s left.
Example: $20,000 profit
| Step | Maya | Leo |
|---|---|---|
| Salary (Maya manages full-time) | $8,000 | $0 |
| Remaining $12,000 split 50-50 | $6,000 | $6,000 |
| Total | $14,000 | $6,000 |
Maya gets more because she works full-time!
Method 5: Interest on Capital + Remainder
Partners earn “interest” on their investment first, then split the rest.
Example: $15,000 profit, 10% interest on capital
| Partner | Capital | Interest (10%) | Remainder (50-50 of $11,000) | Total |
|---|---|---|---|---|
| Maya | $20,000 | $2,000 | $5,500 | $7,500 |
| Leo | $20,000 | $2,000 | $5,500 | $7,500 |
The Complete Picture: Combining Methods
Real partnerships often combine several methods!
Example: Sunrise Café Partnership
- Alex invested $30,000
- Jordan invested $20,000
- Profit for the year: $25,000
Agreement:
- Each partner earns 5% interest on capital
- Alex gets $6,000 salary (manages full-time)
- Remaining profits split equally
The Calculation:
graph TD A["$25,000 Profit"] --> B["Step 1: Interest"] B --> C["Alex: $1,500"] B --> D["Jordan: $1,000"] A --> E["Step 2: Salaries"] E --> F["Alex: $6,000"] E --> G["Jordan: $0"] A --> H["Step 3: Remainder"] H --> I["$16,500 Ă· 2"] I --> J["Alex: $8,250"] I --> K["Jordan: $8,250"]
| Partner | Interest | Salary | Remainder | Total |
|---|---|---|---|---|
| Alex | $1,500 | $6,000 | $8,250 | $15,750 |
| Jordan | $1,000 | $0 | $8,250 | $9,250 |
Check: $15,750 + $9,250 = $25,000 âś…
What If There’s a LOSS?
Losses are shared the same way as profits—using whatever method the partners agreed upon.
Example: $8,000 loss, split 50-50
| Partner | Share of Loss |
|---|---|
| Maya | -$4,000 |
| Leo | -$4,000 |
Both capital accounts decrease by $4,000.
🎯 Key Takeaways
Sole Proprietorship
- ONE owner owns everything
- Capital account tracks investments, profits, and withdrawals
- Simple but risky—you’re personally liable
Partnership
- TWO or more owners share the business
- Each partner has their own capital account
- Contributions can be cash OR property
Profit Sharing
- Equal split—everyone gets the same
- Agreed ratio—pre-decided percentages
- Capital ratio—based on investment amounts
- Salaries + split—reward extra work
- Interest + split—reward bigger investments
- Combined methods—mix and match!
🌟 The Beautiful Truth
Non-corporate equity is about PEOPLE owning businesses together (or alone). It’s personal. It’s real. It’s how most small businesses around the world work.
Whether you’re running a cookie stand by yourself or opening a café with your best friend, understanding these concepts helps you:
- Know what you truly own
- Track your business fairly
- Share profits honestly
- Build something meaningful
You’ve got this! 🚀