Equity interest definition
/What is an Equity Interest?
Equity interest is the ownership share of a shareholder in a business. For example, having a 15% equity interest in a company means that a shareholder owns 15% of the business. An equity interest does not necessarily mean that a shareholder is entitled to a proportionate share of the income generated by an investee. Only if a business generates positive cash flow can it issue dividends to its shareholders. However, if the business is eventually sold off or liquidated, the shareholder will be paid his proportionate share of any residual interest remaining after all creditor claims have been settled.
Majority and Minority Equity Interests
An equity interest of 51% or more gives a shareholder voting control over an investee; otherwise, the shareholder is considered to have a minority interest. When a shareholder has a majority equity interest in a business, he or she can control its board of directors, and so can also replace its chief executive officer. A shareholder with a minority interest has much less control over the business, if any.
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FAQs
What is the Difference Between a Controlling and a Minority Equity Interest?
A controlling equity interest refers to owning enough shares (typically over 50%) to direct a company’s policies, operations, and strategic decisions. A minority equity interest represents a smaller ownership stake that entitles the holder to profits but provides little or no influence over management decisions. While both reflect ownership, only controlling interest grants decision-making power and the ability to consolidate financial results.