Capital and Capital Structure of a Business

What is Capital?
What is Capital?. Oliver Burston/Getty Images

Definition:

The term Capital has several meanings and it is used in many business contexts. In general, capital is accumulated assets or ownership.

Origins of the Term "Capital" 

The roots of the term "capital" go back to Latin, where the term was capitāle, meaning wealth. Much later, in the mid 19th century during the Industrial Revolution, capital began to be used as a basis for other words. For example, capitalism" is a system in which wealth and property (capital) are owned by private individuals rather than a state.

 

Another term based on the term "capital" is "capitalist." A capitalist, in the simplest terms,  is someone who invests money in making more money - a "profit" (net income).

Capital in Business

Business owners are, by definition, capitalists, because they own capital. This capital is in the form of assets (things of value). Capital is a necessary part of business ownership because businesses must use assets to create products and services to sell to customers.

  • Capital is the amount of cash and other assets owned by a business. These business assets include accounts receivable, equipment, and land/buildings of the business.
  • Capital can also represent the accumulated wealth of a business, represented by its assets minus liabilities.
  • Capital can also mean stock or ownership in a company. A capitalist is also a stockholder. 

Capital Structure of a Business 

The capital structure of a business is the mix of types of debt and equity the company has on its balance sheet.

The capital or ownership of a business can be evaluated by knowing how much of the ownership is in debt and how much in equity. Capital structure is sometimes referred to as a company's debt to equity ratio.

Capital Used in Other Business Terms

Other associated terms which relate to the term "capital" in a business situation are:

Capital gains and losses are increases or decreases in the value of stock and other investment assets when they are sold. Capital gains taxes are payable on capital gains, at a different rate from ordinary business gains.

Capital improvements are improvements made to capital assets, to increase their useful life, or add to the value of these assets. Capital improvements may be structural improvements or other renovations to a building, or they may enhance usefulness or productivity.

Capital improvements, which must be capitalized, are distinguished from deductible repairs, which are more minor in nature. For example, the following are considered deductible repairs:

  • wallpapering and painting
  • caulking seams
  • repairing a roof
  • mending plaster
  • replacing retaining walls, tuck pointing

These items are considered capital improvements:

  • installing new doors or windows or replacing doors and windows
  • replacing a roof
  • installing an air conditioning or ventilation system 
  • installing a burglar alarm system
  • improving a storefront

    Business startup costs are also considered as capital expenditures

    Venture capital is private funding (capital investment) provided by individuals or other businesses to new business ventures.

    A capital lease is a lease of business equipment which represents ownership and is reflected on the company's balance sheet as an asset.

    A capital contribution is a contribution of capital, in the form of money or property, to a business by an owner, partner, or shareholder. The contribution increases the owner's equity interest in the business.

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