What Is a Variable Interest Entity?

A variable interest entity is a method that can be used to own a particular business entity. With this type of entity, the amount of rights of the controlling owner of the business are limited compared to most other business structures. In order to qualify as a variable interest entity, the business has to meet certain criteria. Here are a few things to consider about this unique form of business ownership.

Requirements

There are 3 different requirements that can be met in order to qualify as a variable interest entity. The business has to meet at least one of these requirements before it can be considered as a variable interest entity. One of the requirements is that the amount of money that the investor has at risk cannot be sufficient enough to support the entire business. This means that business has to be able to support itself through other activities besides the amount of money that was invested by the controlling investor.

Another requirement is that the individuals who have substantial amounts of equity at risk do not necessarily control the business entity. This means that even though the individuals have the biggest amount of money at risk, that does not mean that they have the majority of the voting rights in the company.

The third requirement is known as the anti-abuse rule. This rule states that the economics do not necessarily coincide with the voting rights of the company. This means that their shares of ownership in the company can still receive the same return on investment as everyone else. However, that does not mean that they have the same voting rights as the other investors in the company.

Sustainability

One of the benefits of this type of business structure is that it promotes sustainability. With this type of business model, the individuals that have the most money at stake do not necessarily have the power to make important business decisions. The decisions are generally reserved for experts in the industry that know how to run a successful business but do not have the capital to start their own. With this business model, even if the economy is down and the business is not performing that well, the individuals with the most equity at risk will not be able to shut the business down and sell off the assets. They basically have to stay involved in the investment as long as the other owners of the company deem it wise. This often leads to businesses staying in tact through down economic periods.

Primary Beneficiary

The individual or business that has the most equity at stake is known as the primary beneficiary. The amount of equity that they have in the company will potentially change when the value of the company increases. This has the effect of increasing the individual's monetary investment but it does not necessarily increase the amount of power that they have over the business.

blog comments powered by Disqus
Scottrade