The capital funds used in business enterprises fall into two classes, "owned funds"

and "borrowed funds." In an individual proprietorship or in a partnership the

distinction is clear and easily made. The total value of the assets of such a business
is represented on the liability side of the balance sheet, first by obligations, or
"borrowed funds," and secondly by proprietorship, including whatever surplus has
accumulated.
In a corporation the distinction between "owned" and "borrowed" capital is not
always so clear, nor is it so vital. The corporation itself owns all of its assets and
owes not only its obligations; but also its capital stock and surplus. The creditors
and the shareholders of the corporation hold varying amounts and degrees of
claims against the corporation which almost imperceptibly shade into each other.
The distinction between debenture bonds and certain types of preferred stock is
slight. Indeed, it would be difficult to name any dividing line which clearly separates
the shareholders from the obligation holders, or creditors, of a corporation.
Nevertheless, we may in general follow the customary line of distinction and say
that most bonds, notes, accounts payable, and other obligations of a corporation,
may be regarded as representative of borrowed capital, and most shares of capital
stock may be regarded as representative of owned capital.
Some companies have practically nothing but owned capital; that is to say, their
borrowings are almost nil. Ordinarily, the only corporations in this condition are
those which have just started, or those which are small and struggling and have not
the credit which would enable them to borrow even on short time. Once in a while,
however find a large corporation which follows the same policy. For instance, the W.
L. Douglas Shoe Company carries on the liability side of its balance sheet only
common stock, preferred stock, and a small amount of current accounts payable.
A small enterprise is usually conducted on the owned capital of the proprietor or the
partnership, with possibly recourse to the bank for short-term loans from time to
time. Also, the proprietor or one of the partners will sometimes, borrow money for
the business on his personal note, secured perhaps by mortgage of his real estate,
and thus increase his investment and the amount of the partnership's owned capital
by the amount so secured.
When there is a single proprietor, he may perhaps, when additional capital is
required, secure this by the admission of a partner with capital A partnership might
accomplish the same result by adding another partner. It is possible at times for
firms to secure additional capital by admitting special or limited partners, who take
no active part in the business but who invest capital and share In the profits. In
many states the statutes. provide that the speicial or limited partner shall not he
liable to creditors of the firm beyond his investment. When the statutes do not
provide for limited partnership , the same end may be accomplished by admitting a
dormant, silent, or Sleeping partner. The dormant partner takes no part in the
business, and usually avoids publicity as to his connection with the business. if
known to be a partner, he may be held for the partnership obligations, like any
other member of the firm.

It is, of course, always possible for a sole proprietorship or partnership to

incorporate and issue stock; if it does so, its capital problems are then the same as
those of any other Corporation Many small businesses have been incorporated, and
most businesses when they increase to a certain point incorporate, on account of
the facility given by the corporate forms in securing additional capital.
Capital contributed by the owner or entrepreneur of a business, and obtained, for
example, by means of savings or inheritance, is known as own capital or equity,
whereas that which is granted by another person or institution is called borrowed
capital, and this must usually be paid back with interest. The ratio between debt
and equity is named leverage. It has to be optimized as a high leverage can bring a
higher profit but create solvency risk.

Borrowed capital[edit]
This is capital which the business borrows from institutions or people, and includes
debentures:
Redeemable debentures
Irredeemable debentures
Debentures to bearer
Ordinary debentures
bonds
deposits
loans
Own capital[edit]
This is capital that owners of a business (shareholders and partners, for example)
provide:
Preference shares/hybrid source of finance
Ordinary preference shares
Cumulative preference shares
Participating preference shares
Ordinary shares
Bonus shares
Founders' shares
These have preference over the equity shares. This means the payments made to
the shareholders are first paid to the preference shareholder(s) and then to the
equity shareholders