Equity Vs. RoyaltyDifferences You Need to Know Between the Two!

Written By:
Lisa Borga

Equity and royalty are two very important concepts that represent types of ownership and a right to payment from companies.

However, there is a very significant difference between the two.

Equity represents ownership in a company, and equity shareholders receive a share of excess profits in the form of dividends in compensation after all liabilities are paid.

In contrast, royalties are simply compensation paid to the legal owners of an asset that a company uses.

This can include a wide range of assets such as patent copyrights or other property which a person or company wishes to use but does not legally own.

Equity

Equity in a given company represents an equity shareholders’ degree of ownership in the company.

In return for holding equity, shareholders receive a share of the company’s future profits.

There are a few common types of equity, including common stock, preferred stock, retained earnings, and share premium.

There are two primary ways in which a shareholder can receive returns on their equity, including dividends and capital returns.

In the case of dividends, the company in which the individual owns shareholder’s equity may periodically choose to distribute part of its profits to shareholders proportional to their ownership in the company.

In the case of capital gains, a shareholder’s equity may appreciate in value over its initial value providing its owner with a profit should they ever choose to sell it on an equity market.

In addition, providing holders with profit equity may give shareholders certain rights in the company depending upon the type of equity they hold.

Holders of common stock, for instance, vote to elect the board of directors as well as upon certain corporate policies.

Royalty

A royalty is a payment made to the legal owner of an asset for its use.

Companies depend upon access to resources in order to continue operations, whether it is patents, copyrights, natural resources, trademarks, or any other physical or intellectual property.

In many cases, a company may own most or all of the resources they require in order to do business, but in some cases, a company may choose to acquire certain assets from others.

When a company uses assets that belong to another entity, it will pay a royalty to its legal owner in return for its use according to the agreed-upon terms.

When royalties are arranged under a binding contract, it represents an agreement that the person using the asset will have the use of the property, and its owner will receive royalty payments.

Equity Vs. Royalty Quick Facts

Key Differences Between Equity and Royalty

• Equity is the degree of ownership in a company that belongs to its equity shareholders, whereas royalty refers to the payment that a company makes for the use of assets that belong to another entity.
• There are several distinct types of equity shares that a company can issue, and these may grant different rights to shareholders. An example of this is common versus preferred stocks. Common stock offers voting rights, whereas preferred shares only offer a higher assurance of receiving dividends. In contrast, royalty payments are simply a fixed income that will be received in return for the use of an asset.
• In the case that a company was to go bankrupt and its assets were to be liquidated, then equity shareholders would receive a portion of the proceeds proportional to their ownership after all other debts have been paid. For royalties, the same situation would result in no change in ownership. As long as the company continues to use the asset in question, it will owe royalty payments to the property’s legal owner regardless of their profits.
• An initial offering of equity on a public exchange can provide a company with capital to purchase assets. Acquiring the use of assets from another party can offer an alternative means of acquiring resources with a less significant initial outlay at the cost of periodic royalty payments.

Final Thoughts

Equity and royalty are two very different business concepts that both relate to the ownership of property and can result in cash outlays by a company.

Equity refers to ownership in a company, whereas royalty refers to payments made for the use of an asset that does not belong to the company making the payments.