Alternate name: minority interest
Non-controlling interests are important when it comes to businesses that own subsidiary companies, such as holding companies. These parent businesses own enough shares in their subsidiaries to exercise control over them, but they may not own 100% of the shares in their subsidiaries. Parent companies have to note non-controlling interest in their subsidiaries on their balance sheets under stockholder equity. One real-world example of non-controlling interests involves Warren Buffet’s company, Berkshire Hathaway. Berkshire Hathaway is one of the largest holding companies in the world. It focuses primarily on buying shares in other businesses that management feels are poised to increase in value. In June of 2001, Berkshire Hathaway acquired 90% of the shares in a company called MiTek Inc. The management of MiTek retained the remaining 10% of the shares. Each manager who owned shares of MiTek owned a non-controlling interest in the company, which became a subsidiary of Berkshire Hathaway.
How Does Non-Controlling Interest Work?
Anyone who owns less than 50% of the shares in a company has a non-controlling interest in that business. However, non-controlling interests have a specific effect on how companies can manage their accounting in the context of subsidiaries owned by parent companies. When a parent company owns a controlling interest in a subsidiary business, it can prepare consolidated financial statements that treat the assets, liabilities, and cash flows of both the parent and its subsidiaries in one document. This can be convenient for holding companies as it saves them the effort of preparing many financial statements. However, if there are non-controlling interests in one or more of the parent company’s subsidiaries, the process becomes more complicated. To use the example from before, Berkshire Hathaway owns 90% of MiTek Inc. The non-controlling interest of MiTek owns 10% of the business. MiTek reported $28.77 million in total revenue between Jan. 1 and March 31 of 2021. Because Berkshire Hathaway only has 90% of the shares in the company, it can only account for 90% of that revenue. The following calculation shows that Berkshire Hathaway accounted for $25.89 million: $28.77 million x 90% = $25.89 million The remaining $2.88 million in revenue can’t be included in Berkshire Hathaway’s consolidated financial statements.
Non-Controlling Interest vs. Controlling Interest
An investor owns a non-controlling interest in a business when they don’t own enough shares in a business to have complete control over the company. That means the shares they own don’t entitle them to more than half of the votes in the company. Other investors with voting rights can still influence the direction of the company. By contrast, an investor who owns a controlling interest in a business owns more than 50% of the shares in the company. This gives them the power to single-handedly decide all votes at shareholder meetings. That lets them make decisions about the company’s direction and exercise control over how the company is run. For example, Berkshire Hathaway owns 90% of the shares in MiTek. This gives Berkshire Hathaway a controlling interest because it owns enough of the shares to single-handedly make decisions when voting at MiTek’s shareholder meetings.
What It Means for Individual Investors
Most individual investors won’t acquire a controlling interest in a business. Well-known, publicly traded businesses have market capitalizations in the billions, and sometimes even trillions of dollars, which is more money than most retail or individual investors have. This means that most individual investors will wind up with non-controlling interests in any business in which they own shares. This doesn’t mean that they cannot profit from owning shares in those companies. It simply means that they won’t be able to exercise sole control over how the company is run. So long as no single investor or parent company owns a controlling interest in a business, its shareholders with non-controlling interests can still influence the company with their votes.
