Minority Equity Investment: Everything You Need to Know
A minority equity investment refers to any investment made into a business that doesn't represent the majority of ownership or give the investor control.3 min read
2. Minority Investments (Minority Interest)
3. What is a Minority Investment?
When an investor has a minority interest in a business, they hold a significant percentage of ownership, but do not have the ability to control business decisions. In business accounting, only the minority interest dividends are included on the balance sheet, unless the owner maintains enough ownership interest to have some type of influence over business decisions, but does not have complete control. If this is the case, both the ordinary income and dividends must be included on the balance sheet.
On the parent company's balance sheet, a liability indicates how much of a subsidiary company is not owned by the parent. For example, when a parent company owns 90 percent of a subsidiary company, and the other 10 percent is traded on the public market, that 10 percent's dollar amount would be included as a liability on the balance sheet. In accounting terms, a minority interest refers to when a parent company owns less than 100 percent of an affiliated or subsidiary company.
The term may also refer to a proportional ownership of a business that isn't enough to maintain complete control. In general terms, a minority interest is when a business or individual owns less than 50 percent of the shares for voting. When the combined shares of all shareholders are less than 50 percent of the total issued shares, those shareholders hold a minority interest in the corporation.
In many cases, the holdings of those classified as minority shareholders combined are much less than half of the total issued by the business. In the example of a partnership, a partner who owns a smaller percentage of the business than any other partner has a minority interest in the company. It is a challenge in most cases for minority interest investors, members or owners to have any type of major influence on business policies.
If a portion of a subsidiary company is not owned by the company that holds it, this portion is referred to as share capital. When a holding company has ownership of over 50 percent of the subsidiary company's issued shares, the holding company maintains control of the business. However, if the holding company owns less than 100 percent of the issued shares, the subsidiary company's other shareholders must be recognized, even those that are considered to have a minority interest.
When compiling consolidated accounts, the minority interest investors or owners can make claims to group assets. These claims must be recognized, as even those with a minority interest are entitled to share in the company's profits.
Minority Investments (Minority Interest)
If another company or an investor holds a non-controlling share in a business, this is referred to as a minority investment. For example, if a private equity firm invests in a business, it will often maintain a non-controlling share. Most private equity firms invest less than 50 percent of the total number of issued stock shares of a business.
A minority investment can be minority active interest or minority passive interest:
- Active interest means that the investor has some influence over the company and its policies.
- Passive interest means that the investor has no material influence over the business in which it is investing.
If a passive investment has been made, only the amount of the dividend paid by the minority investor should be recorded in the accounting documents. Both the percentage of income and dividends received should be included in the company's financial records for active investments. Under the International Financing Reporting Standards (IFRS), all minority investments must be included on the consolidated balance sheet under the equity section.
However, if your business follows the United States Generally Accepted Accounting Principles (GAAP), some flexibility exists for where to report minority interest. You can include it under:
- The mezzanine section.
What is a Minority Investment?
When you're looking for a more creative way to get involved in a business, a minority investment could be a good option. These transactions are often overlooked, but there are a number of ways to get involved. A company or individual could form a strategic alliance with another business or it could acquire 100 percent of the ownership interest. Providing a minority investment in a business falls between the two ends of the spectrum.
If you need help with a minority equity investment, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.