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When a company needs funding for activities such as expansion, research and development, or simply to keep the operations running, they often explore the option of public financing. This way, they can get funds from the public against giving up part ownership of the company. With the part of the ownership, the shareholders also get to have a say in the company operations, which is known as the controlling interest.
In this article, we will look at what is controlling interest with its examples and advantages.
What is controlling interest?
When companies move from being private companies to public companies, they have to be more transparent about their functioning. Not just this but when a shareholder buys a share and gives the company money, they also own a part of the company.
Depending on the shares held in the company, the shareholders also get a say in the company decisions that are known as the controlling interest.
Some of the benefits gained by the shareholders are voting rights, profits with the company’s growth and also limited liability. The more the number of shares, the more the controlling power and the less the shares, the less the controlling power.
How does controlling interest work?
The controlling interest of the company entirely depends on its voting shares. The person who owns more voting shares will have more decision-making power. If the shares owned do not have voting shares then the shareholder will not have a controlling interest.
The shareholder with over 50% voting shares has the maximum controlling interest in the company. They can make influential decisions about the company and its meetings, and they can also overturn or veto the decisions made by the existing board members.
Let us say that Mr X has 5100 shares of the total 10,000 outstanding shares of the company ABC Ltd in the market. Mr X has 51% of the shares. If all shares have equal votes then he holds the majority in the company that gives him the controlling interest.
Advantages of controlling interest
With an understanding of what controlling interest is, let us now understand some of its advantages. These include:
- Decision-making power
The shareholder or shareholders who have the majority stake in the company have the decision-making power. They can influence the decisions of the board and make organisational and functional changes in the company.
- Profit share
Whenever the company earns a profit, the controlling shareholders of the company get a part of it. This takes place in the form of dividends, share splits, retained earnings, etc.
- Enhanced management
The company management works more effectively and efficiently. This is because the controlling shareholders keep an eye on the company’s operations to ensure that their investments are not negatively impacted.
- Board of director
The controlling shareholder stands the highest chance of becoming a part of the board of directors of the company.
Drawbacks of controlling interest
While there are several advantages, let us also look at a few disadvantages:
- Huge impact in case of losses
If the company does not perform well, the controlling shareholders are most likely to suffer the maximum loss because of the high percentage of their interest in the company.
- Conflict with other shareholders
There is a huge possibility of a conflict between the controlling shareholders and the other shareholders. The controlling shareholders might try to remove the stake of the minor shareholders altogether from the company.
Controlling interest vs non controlling interest
Finally, let us understand controlling interest vs non controlling interest with the comparison below.
The controlling interest involves a majority ownership stake that is usually more than 50% of the voting shares, which gives them significant control over the company. As against this, non-controlling interests have minority ownership, less than 50% stake in the company, and do not have control over decision-making.
The controlling interest has a say in the strategic direction taken by the company, governance structure, organisational policies, overall business operations, and management selection. The same is denied to non-controlling interests.
Conclusion
If an individual or a group of individuals have a majority of the voting shares in the company, they have the right to make important decisions concerning the business. This can sometimes also lead to a conflict of interest between the minor and the majority stakeholders. Additionally, it also comes with a responsibility to act in the best interest of all stakeholders.
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FAQs
Controlling interests refer to the controlling power of the majority shareholders in the company when they buy more than 50% of the voting shares in a company.
Controlling interest comes with having more than 50% of the company’s voting shares and gives the right to make significant organisational decisions. On the contrary, non-controlling interest is a minority share of less than 50% and does not provide any organisational decision-making power.
The advantages of controlling interest include decision-making ability, profit share, better company management and entry to the board of directors.
The disadvantage of controlling interests is that they can lead to a conflict of interest between the majority and minority stakeholders. Additionally, if the company’s value goes down, then the majority shareholders have to suffer the maximum impact.
Yes, being a majority stakeholder of the voting shares in a company can provide decision-making power. Additionally, it also comes with a considerable possibility to enter the board of directors of a company.