Difference Between Equity vs Royalty
Resources play a major role in all type of organizations. There are different ways by which an organization can acquire and incorporate the different resources required in their business operations. Some of the businesses have the direct and full ownership on the resources which they will require in order to produce and provide the goods and services to its customers while the other will acquire the assets from the owner and use them for the commercial purpose. In case of the ownership, shareholders hold the equity of the company and get the returns in the form of dividend and capital gain. On the other hand when the company uses the resources of the other persons then it has to pay the royalty to the legal owner of the property. Businesses have to research the pros and cons of the different options available and then select the best for their organization out of them.
In this article, we discuss the differences between Equity vs Royalty in detail.
What is Equity?
Equity of the company represents the ownership of the company which the shareholders own. The equity shareholders against their owners get the share in the future profits of the company. The main types of equity include Common stock, retained earnings, share premium and the preferred stock. The shareholders return for the equity in the company can be in form of either dividend or the capital Gains where dividend is the amount paid out of the profits earned by the company and the capital gains are the appreciation in the share prices of the company when there is a huge demand for the shares of the company in capital market.
What is Royalty?
Royalty payments are the payments which are made to the owner for using their assets or property. The example of assets includes patents, natural resources, franchises, or copyrighted works. The payment of royalty is made to the person who is the legal owner of such patents, natural resources, copyrighted work, property or franchise by the licensees or the franchisees for the purpose of using the asset or property with the motive of generating the revenue or doing any other activity as agreed between them. Royalties mostly are legally binding on both of the parties as they are designed for compensating the owner of the property as his property or resource is used by some another person. So the royal interests are legal rights which give the rights to the owner of the property to collect the royalty payments.
Equity vs Royalty Infographics
Here we provide you with the top 6 difference between Equity vs Royalty
Equity vs Royalty – Key Differences
The key differences between Equity vs Royalty are as follows –
- The main difference between the equity and the royalty is that the equity is a capital contribution by shareholders of the company while the royalty is the payment which the company makes to the owner of the property for using its property.
- As there are different types of the shares which the company issues, so the shareholders receive the number of rights in the company which will depend on the share type they hold. For example, voting rights are provided within the case of the common shares but in case of preference shares generally, the guaranteed dividend entitlement is provided. However, the royalty is the fixed income earned by the company when it lends its assets to others.
- In case of liquidation shareholders holding equity will get the payment of the profits remaining after the payment of all other dues subject to percentage of ownership they have. In the case of royalty even if the company is experiencing lower or no profits, no change will be there in its royalty income. However, charging royalties is very difficult for many companies.
Equity vs Royalty Head to Head Difference
Let’s now look at the head to head difference between Equity vs Royalty
|Basis – Equity vs Royalty||Equity||Royalty|
|Meaning||The amount of the capital which is owned by the shareholders of the company is known as Equity.||When the person uses the assets of the other person then he has to make a payment to the owner of the asset for compensating for use of asset owned.|
|Ownership||By the way of Equity, ownership is granted to the person in the company.||The person makes the payment of royalty for using the assets over which no ownership of the company is there. Thus no ownership exists in case of royalty.|
|Types||The main type of equity includes Common stock, retained earnings, share premium and the preferred stock.||The main type of royalty agreements which are widely used includes Patents, property, franchises and the copyrights.|
|Return||The returns in case of the equity to the shareholders of the company are generally in form of the dividends and the capital gains.||The returns in case of the royalty are in form of the royalty payments made by the company for using the assets of the other person.|
|At the time of Liquidation||If the situation of liquidation prevails, the shareholders holding the equity will get the payment of the profits remaining after the payment of all other dues subject to percentage of ownership they are having.||The situation of liquidation does not affect the payment of the royalty as royalty is guaranteed an income of the company who is allowing the other to use its assets, and it is paid even in case of fewer profits|
|Example||The company makes the product for $100 and then sells them at $300 and after deducting all the expenses the net income comes to $100. Now if one of the shareholders is holding the 10% equity then it will get $10 as the return (10% of $100 profit)||The company makes the product for $100 and then sells them at $300 and after deducting all the expenses the net income comes to $100. Now if one has the royalty income of 10% then it will get $30 (10% of $300 sales value)|
The company should choose the mode of obtaining resources carefully after analyzing all the differences prevailing. The main difference between the equity vs royalty which is related to ownership criteria should be analyzed properly before choosing. Equity is the representation of the ownership in the company however the royalty gives only the right to use the property for the period specified as per the agreement between the parties and does not provide the right to the company to own an asset. In the present equity is the most common scenario which is prevailing in many companies whereas the royalty scenario is not used very often as it comes if the company has some unique product to offer.
This has been a guide to the Equity vs Royalty. Here we discuss the top differences between Equity vs Royalty along with infographics and comparison table. You may also have a look at the following articles –