Owning stock gives you part ownership in a corporation, but if you own 100 shares out of 500,000, you don't count for much. Gaining significant or controlling influence requires owning a bigger stake, but how many shares is that? Happily, calculating ownership percentage is doable.
TL;DR (Too Long; Didn't Read)
Read the owner's equity section of the balance sheet to learn the number of outstanding shares. If the company has 600,000 shares and you own 200,000, then your ownership share is 33%.
Calculating Ownership Percentage
The first step in a percentage-share calculation is to learn how many shares the company has currently. The company's articles of incorporation list how many authorized shares with which it began, but that won't tell you how many added shares have been issued since then. To start your percentage-share calculation, read the company's balance sheet.
- In the owner's equity section, look up how many shares of preferred stock have been issued. There may be none, as not all companies issue preferred stock.
- Do the same for common stock.
- Look up the number of shares of treasury stock. These are shares the company repurchased from investors, though like preferred stock, there may not be any.
- Add the number of preferred and common shares together and subtract the treasury stock.
For example, suppose the Ziggurat Corporation has issued 500,000 shares of common stock and 100,000 shares of preferred stock. There are no treasury stock buy-backs. Therefore, Ziggurat has 600,000 shares of stock outstanding.
Ownership and Dilution
Suppose you're interested in 10% ownership of a company. To gain that stake in Ziggurat, you'd need to buy 60,000 shares. You can use a similar percentage-share calculation if you start a privately held company.
Say you start out with yourself and four investors, each with a 20% stake in the company. If you issue 200,000 shares of stock, each of you would have 40,000 shares at the start. If you retain 120,000 shares for yourself, you have a dominant 60% ownership, with the investors getting 10% each.
Even if you don't sell your shares, you may have to issue more stock to attract other investors. This dilutes your control of the company. If you issue another 200,000 shares to new investors, then your 60% share is now 30%, and you're no longer the majority owner.
Equity or Cost
When one corporation invests in another company, calculating ownership percentage becomes more important. If you own a controlling interest, you account for profits and losses from your investment by the equity method. If your interest is minor, you use the cost method.
Suppose you spend $250,000 to buy 30% of Ziggurat and exercise a lot of influence. If Ziggurat makes $100,000 in profits for the quarter, then 30% of the profits are yours. In your accounts, you bump up your $250,000 investment by another $30,000 to $280,000.
Under the cost method, Ziggurat's profits or losses don't affect your accounting at all. If Ziggurat issues dividends, you do report the investment income.
How Much Is Enough?
As a rule of thumb, if your company buys 20% interest in Ziggurat, that's a sign that you have significant clout and should use the equity method. If all you have is 10% ownership of a company, you go with cost. This isn't an iron-clad rule, and there are several exceptions.
If you have representatives on the board of directors, influence Ziggurat policy or exchange management personnel with them, those would be signs that you exercise significant control. If you have only 10% ownership but other investors are all at 1% or 2%, that would be evidence of your influence.
Even if you hit the 20% ownership level, you may not be a major influencer. Evidence that you have little influence could include the fact that you can't get representatives on the board, the majority shareholder ignores you or the company challenges your control by suing or complaining to regulators. These might justify you using the cost method of accounting.
Fraser Sherman has written about every aspect of business: how to start one, how to keep one in the black, the best business structure, the details of financial statements. He's also run a couple of small businesses of his own. He lives in Durham NC with his awesome wife and two wonderful dogs. His website is frasersherman.com