Key Difference – Equity vs Royalty
Resources are vital for all organizations and there are different ways of incorporating them into the business operations. Some businesses have direct ownership of resources that are used to produce goods and services while some acquire assets from owners to use for commercial purposes. The key difference between equity and royalty is that while equity is the amount of capital continued by the shareholders in the company, royalty is a payment made to the owner to reimburse for the use of a property.
CONTENTS
1. Overview and Key Difference
2. What is Equity
3. What is Royalty
4. Side by Side Comparison – Equity vs Royalty
5. Summary
What is Equity?
Equity represents the ownership of the company as this is owned by shareholders. The components of Equity are as per below.
Common Stock
This is owned by principal owners of the company and these are all equity shares.
Preference Shares
Preference shares are also equity shares; however, they may have fixed or floating dividend rates.
Share Premium
Share premium is the additional amount of funds received exceeding the par value of a common stock.
Retained Earnings
These are accumulated net earnings not paid out to shareholders in the form of dividends and retained in the company for future investing purposes.
Returns for Equity
Dividends – An amount of funds paid to shareholder out of profits
Capital Gains – Appreciation in share price due to the higher demand for company’s shares
Equity shareholders receive a number of rights depending on the type of shares held. For instance, common shares have voting rights and preference shares are usually entitled to guarantee dividends. In the case of liquidation, the equity shareholders get paid the remaining profits up to the percentage of their ownership.
What is Royalty?
Royalty is a payment (royalty fee) made to the owner of a tangible or an intangible asset such as a property, patent, copyright, franchise or natural resource. This payment is made in order to compensate the owner for the use of the asset. Use of Royalty is a legally binding contract. Patent, copyright and franchise are common arrangements that pay royalty fees.
Patent
A patent is a right granted to a company to manufacture a product exclusively. To acquire a patent, the company should heavily invest in research and development, time and other resources and introduce a unique new product. The seller of the product should pay the company a part of the proceeds earned by selling the product to the end customer
Copyright
This is a form of intellectual property, applicable to certain forms of creative work. Copyright holders obtain the exclusive right to license, make copies of printed, audio or video versions of the intellectual property in concern.
Franchise
A franchise agreement is a type of license that a party (referred to as franchisee) acquires from another business (referred to as the franchiser) in order to obtain access to franchiser’s knowhow, processes and trademarks. In return for this right to use these benefits, annul fees should be paid by the franchisee from profits made
Royalties are usually made as a percentage of the revenue obtained using owner’s assets. If the product is extremely technologically advanced, the royalty rate is generally very high. For instance, technology giants such as Apple and Microsoft charges high Royalty fees on their products and operating systems. Further, fast food franchises such as MacDonald’s, Pizza Hut and KFC are very popular in the world.
E.g., by 2017, MacDonald’s charges 12% of total revenue from its franchisees as Royalty fees.
Royalty is a guaranteed stream of income for the company, and even at times that the company is experiencing fewer profits, there will be no change in the royalty income. However obtaining a status to charge royalties is extremely difficult and cannot be done by many companies since the need of a unique product or service.
Figure 1: Operating systems are usually secured through copyrights, which is a type of Royalty
What is the difference between Equity and Royalty?
Equity vs Royalty |
|
| Equity is the amount of capital owned by the shareholders. | Royalty is a payment made to the owner of an asset to compensate for the use of the asset. |
| Ownership | |
| Equity grants ownership in a company. | Royalty is a payment incurred for the use of an asset, over which the company has no ownership. |
| Types | |
| Common stock, preference stock and retained earnings are main types of Equity | Patents, copyrights and franchises are widely used royalty agreements. |
Summary – Equity vs Royalty
The principal difference between equity and royalty is related to the ownership criteria in concern. Equity is a representation of ownership in a company whereas royalty does not give the right to own an asset such as knowhow or trademark, it just gives the right to use the asset in return for a periodic payment. Further, royalty is not a common scenario practiced by all organizations since royalty comes from the ability to invent a unique product.
Reference:
1. “Balance Sheet – Owner’s Equity | AccountingCoach.” AccountingCoach.com. N.p., n.d. Web. 24 Feb. 2017.
2. “Royalty.” Investopedia. N.p., 12 June 2015. Web. 24 Feb. 2017.
3. “Types of equity – Questions & Answers.” AccountingTools. N.p., n.d. Web. 26 Feb. 2017.
4. “McDonald’s Franchise.” Franchise Help. N.p., n.d. Web. 24 Feb. 2017.
Image Courtesy:
1. “1844848” (Public Domain) via Pixabay