There are many types of businesses and in many countries, the amount of income that flows to the owners is very different than the type of income that flows to the other members of the business. The two types of income that are more common are the owners' income and the retained income. The concepts of retained income and owner's equity are commonly used to describe the ownership of a company and can relate to any number of types of companies.
Owner's equity refers to a particular class of accounts that represents the share of ownership in a company by the owner of that company. All of these owners of business, and their spouses, have the same right to the control and ownership of their business. The amount of equity that each member of this class of owners has in the business will generally be equal. However, when it comes to a business that is run by a separate business entity such as an LLC or S-Corp, the proportion of ownership may vary.
Another type of income that flows to the owners is called retained income. This is income that has been earned during the course of business, but is not paid to the owners of the business. Some examples of retained income are profit sharing, and a company's share in the profits of its parent company. The owners' share in the income of the parent company is called retained earnings.
Retained income is normally taxed at a lower tax rate than the owners' income. Because the owners are no longer actively involved in running the company, their ability to use the business as a source of income can be limited. Also, if the business is part of an S-Corp or an LLC, the owners may have limited liability protection, which limits the amount they can claim as income from the assets of the business.
Another type of income that is typically associated with an S-Corp or LLC is referred to as partnership income. In this situation, the shareholders of the company are not necessarily the actual owners of the business. When one of the shareholders is no longer able to function within the business or is no longer able to exercise control, a new shareholder may become an owner.
The owners' equity is the one type of income that has the potential to grow substantially. because the owners have the most control over how their investment is invested and how their equity will grow.