Owners' equity is the total assets of an entity, minus its total liabilities. This represents the capital theoretically available for distribution to shareholders.
In the balance sheet of a sole proprietorship, owners' equity refers to the sum total of the following transactions:
+ Original owner investment in the business
+ Donated capital
+ Subsequent profits of the business
- Subsequent losses of the business
- Subsequent distributions to the owner
= Owners' equity
The amount of owners' equity does not necessarily represent the fair value of a business, so the sale of a business in the exact amount of owners' equity would be purely coincidental. In reality, the sale price could be substantially different, depending on the perceived value of the company's cash flows, intellectual capital, branding, and other factors as determined by the acquirer and agreed to by the acquiree.
The only ways to increase the amount of owners' equity are to either convince investors to invest more funds in the business, or to increase profits.
From a company liquidation perspective, owners' equity can be considered the residual claim on the assets of a business to which shareholders are entitled, after liabilities have been paid.
Owners' equity is known as shareholders' equity if the legal entity of a business is a corporation. It is also known as net worth, net assets, or shareholders' funds.