How to Calculate Equity Based on Paid in Capital
An individual's valuation of his value as an owner, or his basis, is defined by the tax code and the IRS. Basis is measured according to how much an owner contributes to the business, the organizational form, and his responsibilities to the business. Basis is not constant, as business activities can shift the value of an owner's share in a business.
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Instructions
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Assess your responsibilities as an owner. As an owner, your financial responsibilities vary depending on the type of business organization you own. A corporation's shareholders are generally not personally liable for the debts of the business. A partner in a general partnership is personally liable for the business's debts, but a limited partner in a limited partnership is not.
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Determine how much you contributed to the business. Contributions to a business are not just defined by how much cash you contribute, but any property you might have provided as well. Your contribution is defined as the amount of cash you provided plus your adjusted personal basis in the property you supply to the business.
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Calculate your basis. Your basis in the business is the value of the contribution to the business plus your personal liability for the debt. If you own shares in a corporation, you have no personal liability and your basis is just your paid-in capital. If you are a general partner, your basis is your paid-in capital, plus your share of the partnership's annual gain, minus your share of the partnership's losses, plus your share of the partnership's liabilities and minus any cash or property distributions you received from the business. A limited partner's basis is calculated in the same way as a general partner's, but there is no adjustment for the business liabilities.
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Tips & Warnings
The value of your basis can never drop below zero, no matter how many losses or debts the business sustains. When starting a new business, consult with a licensed attorney to ensure that you are in compliance with all legal requirements. Every effort has been made to ensure this article's accuracy, but it is not intended to be legal advice.
