Equity & Capital Glossary
Plain-English definitions of 12 key equity and capital terms — from paid-in capital and retained earnings to owner's drawings, S-Corp distributions, and dissolution.
Capital Contribution
Money or assets put into a business by an owner or shareholder to fund operations or growth. Increases equity. Not revenue, not a loan (unless structured as one). For corporations, usually recorded as paid-in capital. For sole proprietors and single-member LLCs, recorded as owner's capital.
Cost Basis
The original value of an investment for tax purposes, typically what you paid for shares plus any adjustments. Used to calculate capital gains when shares are sold or the business is transferred. Properly documenting your original share issuance amount establishes the starting cost basis.
Equity
The owners' residual interest in the business, what's left after all liabilities are subtracted from all assets. Equity = Assets minus Liabilities. Increases with profits and contributions; decreases with losses and distributions.
Owner's Capital
For sole proprietors and single-member LLCs, the equity account that tracks the net of all money put in (capital contributions), money taken out (drawings), and accumulated profit. The functional equivalent of a corporation's combined paid-in capital and retained earnings.
Owner's Drawings
For sole proprietors and single-member LLCs, amounts withdrawn from the business for personal use. Not a business expense and generally not taxable at the time of withdrawal (the owner already pays tax on business profit). Reduces equity.
Paid-In Capital (Share Capital / Stated Capital)
The total amount shareholders have invested in a corporation in exchange for shares. A permanent equity account, it only changes when new shares are issued or existing shares are repurchased. Not affected by profits or losses.
Retained Earnings
Cumulative corporate profit that has not been distributed as dividends. Increases with profitable years, decreases with losses and dividend payments. Represents the value the business has built and reinvested since inception.
S-Corp Distribution
A payment made to S-corporation shareholders in proportion to their ownership. Distributions are generally not subject to self-employment tax, a key advantage over taking all compensation as salary. The IRS requires S-corp owners to take a "reasonable salary" before taking distributions.
Share Buyback (Share Repurchase)
When a corporation buys back its own shares from a shareholder. Reduces paid-in capital and requires corporate formalities. Has specific tax implications for the departing shareholder, a portion of the repurchase price may be treated as a dividend, with the remainder as a return of capital or capital gain.
Shareholder's Equity
The equity section of a corporation's Balance Sheet. Includes paid-in capital, retained earnings, and any other equity components. Represents what shareholders would theoretically receive if all assets were sold and all liabilities paid.
Surplus
Generally refers to retained earnings that exceed what was originally invested. A business with strong surplus has consistently earned more than it distributed. It's accumulated value.
Dissolution
The formal process of closing a corporation. Assets are sold or distributed, liabilities are settled, and remaining equity is returned to shareholders. The distribution of remaining equity may trigger capital gains and dividend income at the personal level, a significant tax planning event requiring guidance from your NCO advisor.