A controlling interest occurs whenever a shareholder holds the majority of a company's outstanding, or voting, stock. In any publicly traded company, stock is issued to those who invest into the company. However, not all stock that is issued is voting stock.
At its most basic, controlling interest can be achieved whenever a stockholder owns more than 50% of all voting shares in a company. In most cases, however, a shareholder controls less than 50% of the voting shares in a company but still holds more than any other shareholder, and so they have the controlling stake in the company.
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Benefits of Controlling Interest
There are several benefits to having control in a company. The first of those benefits is the fact that the shareholder who has control has the majority vote in that company. If everyone else votes in a direction they do not like, the controlling individual can overturn the votes of the rest of the company's board members. As such, having the majority of shares puts a person into a significant position of influence.
A second benefit to having a majority share is the fact that the majority holder is often placed into the role of chairman of the board of directors. This position grants a person even more power than they would have if they only had the majority vote. As the chairman, the majority holder can make board decisions without consulting the rest of the board. In practice, this means a majority holder can hire executives that they favor for influential positions in the company.
A majority holder also has significant leverage should the company merge or become acquired by another company. When a person holds the majority of shares, they have a significant say over how a company will operate. They may continue to wield majority voting power once the two companies have merged and the company has been restructured. Consequently, owning the majority of shares carries benefits even when a company is undergoing significant changes.
In contrast to a controlling shareholder, a non-controlling shareholder lacks much of the same influence and authority that comes with owning the majority of voting shares. In contrast to a controlling stake, a non-controlling stake is equivalent to less than 50% of outstanding shares. In practice, being a non-controlling shareholder may also mean owning a minority of the voting shares in a company. Although non-controlling shareholders lack the benefits of a controlling stake, there are still benefits to owning a non-controlling stake.
Non-controlling shares are also known as common equity, meaning they carry with them certain rights for the shareholder. Typically, non-controlling shareholders have the right to cash dividends when companies have made sufficient earnings. A non-controlling interest also carries with it the right to vote on major decisions made by a company. It should be noted that even within voting shares, some types of shares carry more voting weight than others, making it preferable to own shares that carry more voting weight with them.
How non-controlling interest is reported on a balance sheet may depend on what principles are being adhered to for reporting. Under generally accepted accounting principles (GAAP), minority interest can be reported in the equity section of a consolidated balance sheet or as a non-current liability. On consolidated income statements, minority interest is documented as a part of the non-controlling stakeholder's profit. Under International Financial Reporting Standards, non-controlling interest should only be reporting on the equity section of a company's consolidated balance sheet.