# Comprehensive Guide to Minority Interest: Definition, Types, and Examples

## What Is a Minority Interest?

A minority interest represents a non-controlling ownership stake in a subsidiary company. Though the parent company holds the majority of voting shares, minority interest holders enjoy some rights, including participating in sales and certain audit privileges.

### Key Takeaways

*   A minority interest is a stake held in a subsidiary where a parent company controls more than 50% of the voting shares.  
    
*   Minority shareholders generally own between 20% and 30% of a company's shares and have limited influence over company decisions.  
    
*   The term "non-controlling interest" is synonymous with minority interest and highlights the limited control such stakeholders have.  
    
*   Financial statements separate minority interests in a subsidiary from a parent company's own equity and income.  
    
*   Minority interests can be passive or active, with active interests allowing for some influence over the company's operations.  
    

![Minority Interest: A stake in a company that is controlled by a larger parent company.](https://www.investopedia.com/thmb/b-VKCUEQZ5humgMoYtUxZ7BbE18=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/minorityinterest.asp-final-475f54d83de048da860a1b8919fc2a74.png)

*— Investopedia / NoNo Flores*

## Insights Into Minority Interests

Minority interests usually refer to the portion of a company or stock not held by the parent company, which holds the majority interest. Most minority interests [range between 20% and 30%](https://www.investopedia.com/articles/investing/082715/how-calculate-minority-interest.asp).

While the [majority stakeholder](https://www.investopedia.com/terms/m/majorityshareholder.asp)—in most cases, the parent company—has voting rights to set policy and procedures, the minority stakeholders generally have very little say or influence in the direction of the company. This is why they are also called [non-controlling interests](https://www.investopedia.com/terms/n/noncontrolling_interest.asp) (NCIs).

In some cases, a minority interest may include rights to participate in sales. There are laws that also entitle minority interest holders to certain audit rights. They may also attend shareholder or partnership meetings.

In the world of private equity, companies and investors with a minority interest may be able to negotiate control rights. For instance, venture capitalists might negotiate a board seat in return for investing in a startup.

Corporations list minority ownership on their balance sheets and report it as a share of profit on the consolidated income statement.

> **Important**
>
> The consolidated income statement must have a clear distinction between the net income from the parent company and that of the minority interest.

## Practical Example of a Minority Interest

ABC Corporation owns 90% of XYZ Inc., which is a $100 million company. In its consolidated balance sheet, ABC will record its $90 million shares in XYZ, as well as the $10 million non-controlling interest to represent the shares of XYZ that ABC does not own.

XYZ Inc. generates $10 million in net income. As a result, ABC recognizes $1 million—or 10% of $10 million—of net income attributable to minority interest on its income statement. Correspondingly, ABC marks up the $10 million minority interest by $1 million on the balance sheet. The minority interest investors do not record anything unless they receive dividends, which are booked as income.

> **Fast Fact**
>
> In 2007, the Financial Accounting Standards Board introduced the phrase "non-controlling interest" as a synonym for minority interest. Although they mean the same thing, the new phrase reflects the fact that there are situations where a non-majority shareholder can still act as a controlling interest.

## Various Types of Minority Interests Explained

A minority interest can either be passive or active. Passive minority interests are those where a minority shareholder owns less than 20% of the equity in a subsidiary company, giving them no material influence on the company's decisions. 

In accounting terms, only the dividends received from the minority interest are recorded for those with minority passive interests. This is referred to as the cost method—the ownership stake is treated as an investment at cost, and any [dividends](https://www.investopedia.com/terms/d/dividend.asp) received are treated as dividend income.

Active minority interests, which involve owning 21% to 49%, allow shareholders to influence the company. Dividends and income shares are recorded for these interests, unlike passive ones. This is referred to as the [equity method](https://www.investopedia.com/terms/e/equitymethod.asp).

Dividends are treated as a return on capital, decreasing the value of the investment on the balance sheet. The percentage of income attributable to the minority interest is added to the investment account on the balance sheet as this effectively increases its equity share in the company.

## Important Considerations for Minority Interests

The most common examples of minority interests occur in subsidiaries where a parent company holds over 50% of voting shares. However, it is also possible for a parent company to exert a controlling interest without a majority stake. This may be the case with [variable interest entities](https://www.investopedia.com/terms/v/variable-interest-entity.asp) that exert control through a contractual obligation rather than ownership.

Regardless of the type of control, a parent company consolidates the financial results of the subsidiary with its own. As a result, a proportional share of income shows up on the parent company's income statement attributable to the minority interest. Likewise, a proportional share of equity in the subsidiary company shows up on the parent's balance sheet attributable to the minority interest.

Before 2008, U.S. [GAAP](https://www.investopedia.com/terms/g/gaap.asp) allowed minority interests to be listed as either equity or [noncurrent liabilities](https://www.investopedia.com/terms/n/noncurrent-liabilities.asp). This ambiguity was later eliminated by a requirement to report minority interests with the parent company's equity. The [International Financial Reporting Standards](https://www.investopedia.com/terms/i/ifrs.asp) (IFRS) also require that minority interest must be recorded in the equity section of the balance sheet.

## The Bottom Line

Understanding minority interest is crucial for investors who need to interpret financial statements accurately. This interest signifies a partial ownership stake in a subsidiary company, with rights often limited by the parent company's control. Typically, minority interests are reflected on a consolidated balance sheet and income statement, providing insight into the financial health and structure of a parent and subsidiary relationship. Whether passive or active, recognizing the nuances of minority interests enables investors to gauge their potential impact on company earnings and shareholder equity.  

> **Article Sources**
>
> 1.  Financial Accounting Standards Board. "[Summary of Statement No. 160](https://www.fasb.org/summary/stsum160.shtml)."
>     
> 2.  Financial Standards Accounting Board. "[Summary of Statement 160](https://www.fasb.org/page/PageContent?pageId=/reference-library/superseded-standards/summary-of-statement-no-160.html&bcpath=tff)."
>     
> 3.  Journal of Accountancy. "[Non-controlling Interest: Much More Than a Name Change](https://www.journalofaccountancy.com/issues/2008/nov/noncontrollinginterestmuchmorethananamechange.html)."
>     
> 4.  UpCounsel. "[Minority Equity Investments: Everything You Need to Know](https://www.upcounsel.com/minority-equity-investment)."