Legal Definitions - capital

In a business or economic context, capital refers to any resource or asset that is used to generate further wealth, goods, or services. It's essentially anything that contributes to the productive capacity of an entity, allowing it to create value. This can include physical items, non-physical assets, or the financial means used to fund operations.

When discussing how a company finances its activities, "capital" also describes the sources of funding. For instance, debt capital refers to money borrowed (like loans or bonds), while equity capital refers to money invested by owners or shareholders. The specific combination of these funding sources that a company uses is known as its capital structure.

Here are some examples to illustrate the concept of capital:

• Example 1: Productive Physical Assets

  A large-scale organic farm invests in a state-of-the-art irrigation system and several new tractors. These items are considered capital because they are physical assets used directly in the production process to grow crops more efficiently and increase output. The farm uses these tools to generate more produce, which in turn generates revenue and profit.

• Example 2: Intangible Assets for Value Creation

  A cutting-edge robotics company spends millions developing proprietary software algorithms that allow its robots to perform complex tasks with greater precision. This specialized software, once developed, becomes an intangible form of capital. It's an asset that enhances the functionality and value of their products, giving them a competitive edge and enabling them to produce more advanced and desirable robots.

• Example 3: Financial Funding for Operations

  A new biotechnology startup needs significant funds to conduct clinical trials for its innovative drug. It secures funding by selling shares to venture capitalists (equity capital) and also takes out a substantial bank loan (debt capital). The money raised from both sources is considered capital because it provides the financial resources necessary to fund the company's research, development, and operational expenses, ultimately aiming to bring a new product to market and generate future revenue. The mix of venture capital and the bank loan forms the company's capital structure.