Equity is the owners' residual stake in a business, what would be left for the owners after all assets are used to pay off all liabilities.
Equity is the third piece of the accounting equation: Equity = Assets − Liabilities. For a corporation it is made up of share capital (what owners invested) plus retained earnings (accumulated profits not yet paid out), less any dividends and losses. It represents the owners' claim on the business.
Rising equity over time signals a business that is retaining profit and building value. For tax and financing, the components matter: paid-up capital can generally be returned to shareholders tax-free, while retained earnings paid out become taxable dividends. Lenders watch the equity cushion as a measure of solvency.
A company has $200,000 in assets and $120,000 in liabilities, so equity is $80,000. That $80,000 is the shareholders' stake, split between the capital they originally invested and the profits the business has retained.
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