Definition of Negative Owner’s Equity
Negative owner’s equity means the amount of a sole proprietorship’s liabilities exceeds the amount of its assets.
Example of Negative Owner’s Equity
Let’s assume that an owner invests $100,000 to begin a new sole proprietorship business. At this point, the owner’s equity is a positive $100,000. During the first year of operations, the business’s expenses exceeded revenues by $108,000 and there were no draws or additional investments by the owner. The owner’s equity at the end of the first year will be a negative $8,000.
The negative amount of owner’s equity is a problem that will be obvious to anyone reading the company’s balance sheet. However, the company may be able to operate if its cash inflows are greater and sooner than the cash outflows necessary for meeting its payments on its liabilities.
