Minority InterestOwnership of less than 50% of the company's total outstanding shares

Patrick Louie

A corporation is a type of business that is owned by several persons (be they natural individuals, or legal entities).

We typically refer to these owners as shareholders or stockholders.

As to why we refer to them as shareholders or stockholders, it’s because ownership in a corporation is typically represented by shares or stocks.

For example, let’s say that a corporation has total outstanding shares of 100,000 units.

You own 1,000 units of such shares.

This means that you own 1% of the corporation.

Depending on the number of shares that a shareholder holds, s/he may have a majority or minority interest in the corporation.

A shareholder that holds at least 50% of the total outstanding shares has a majority interest in the corporation.

We refer to such a shareholder as a majority shareholder.

A majority shareholder will typically also have a controlling interest in the corporation.

However, under certain circumstances, a shareholder may still have a controlling interest even if s/he doesn’t have a majority interest.

If a shareholder holds less than 50% of the total outstanding share, s/he has a minority interest in the corporation.

We refer to such a shareholder as a minority shareholder.

Now while a minority shareholder typically doesn’t have control over most business decisions, s/he is still a co-owner of the corporation.

S/he is still entitled to rights and benefits such as voting rights, dividends, etc.

In some cases, a minority shareholder may even have a controlling interest in the corporation.

In this article, we will be exploring what minority interest is.

How does one define “minority interest”?

Can a minority shareholder influence major business decisions?

On the part of the parent company, is minority interest an asset or liability?

We will try to answer these questions as we go along with the article.

What is a Minority Interest?

minority interest

Minority interest refers to the ownership of less than 50% of a corporation’s total outstanding share.

In other words, it is the portion of a corporation’s total outstanding shares not held/owned by a parent company (typically a majority shareholder).

Minority shareholders typically don’t have significant influence over a company’s major business decisions.

However, they still have rights as shareholders such as having certain audit rights or being entitled to participate in sales (e.g. consolidation, merger).

We may also refer to minority interest as non-controlling interest.

In accounting, a parent company will have to consolidate its financial statements with its subsidiaries.

In cases where the parent company owns less than 100% of a subsidiary’s outstanding shares, the minority interest has to be reported on the consolidated financial statements.

For example, let’s say that the S company is owned by two shareholders: Mj company and Mi company.

The Mj company owns 75% of S company’s outstanding shares, while Mi company owns the remaining 25%.

This makes Mj company a majority shareholder and Mi company a minority shareholder.

Since this is a case where the parent company owns less than 100% of the subsidiary, then the minority interest has to be reported on the consolidated financial statements.

As such, in the consolidated financial statements of Mj company, the book value of the shares that Mi company owns will appear as the minority interest.

Under the US GAAP, as of 2008, minority interest is listed as an equity account on the parent company’s consolidated balance sheet.

It should be a separate account from the parent company’s equity.

This is so that it’s easier to identify the value of the minority interest.

The IFRS also requires minority interest to be listed as an equity account on the consolidated balance sheet.

Majority Interest vs Minority Interest

A majority shareholder (a shareholder with a majority interest) holds at least 50% of the outstanding shares of another company.

This typically gives the majority shareholder a significant influence in major business decisions.

Hence, controlling interest.

On the other hand, a minority shareholder holds less than 50% ownership.

If we compare a minority shareholder to a majority shareholder in terms of influence, the majority shareholders will almost always be the winner.

This is why we also refer to minority interest as non-controlling interest.

However, in some cases, a minority shareholder may have significant include over major business decisions.

This typically happens if the minority shareholder owns a majority of the company’s outstanding shares that has voting rights.

Not all shares carry with them voting power after all (e.g. preferred shares).

A minority shareholder may also acquire control through contractual obligations.

For example, a minority shareholder may negotiate a seat on the board of directors with the promise of additional investment.

This typically occurs in privately funded companies.

Now while a minority interest may not have the same amount of influence that a majority interest has, it still entails some rights for the minority shareholder.

Minority shareholders still have the right to participate in sales. Some laws also entitle minority shareholders to certain audit rights.

And they also have the right to shareholder or partnership meetings.

The majority shareholder will have to consolidate its financial statements with its subsidiaries.

On the other hand, a minority shareholder does not have to.

Rather, the minority shareholder simply records its investment in the company as an asset on its balance sheet.

In regards to when a minority shareholder records income from the investment, it will depend on whether the minority interest held is passive or active.

Passive vs Active Minority Interest

minority interest

A minority interest may be classified as passive or active depending on the percentage of ownership of the minority shareholder.

We classify minority interest as passive if the minority shareholder owns less than 20% of the company’s outstanding shares.

Passive minority shareholders barely have any influence on the company’s business decisions.

As such, they typically just let the majority shareholder make major business decisions.

On the other hand, if the minority holder holds more than 20% but less than 50% ownership of the company, that’s the time when we classify the minority interest as active.

Unlike with passive minority interest, an active minority shareholder can have significant influence over major business decisions.

As such, they may be able to overrule the decisions of the majority shareholder under certain circumstances.

In this case, the investee company becomes an associate company of the active minority shareholder.

A passive minority shareholder only records income from the investment if it receives dividends.

On the other hand, an active minority shareholder records a percentage of the associate company’s income as its own income.

This is in addition to recording any dividends received as income.

FundsNet requires Contributors, Writers and Authors to use Primary Sources to source and cite their work. These Sources include White Papers, Government Information & Data, Original Reporting and Interviews from Industry Experts. Reputable Publishers are also sourced and cited where appropriate. Learn more about the standards we follow in producing Accurate, Unbiased and Researched Content in our editorial policy.

  1. Cornell Law School "12 CFR § 3.21 - Minority interest." Page 1 . August 29, 2022

  2. Stern NYU "Getting to equity value per share" Page 1 . August 29, 2022