What Is a Wholly-Owned Subsidiary?
A wholly owned subsidiary is a company whose common stock is 100% owned by another company. A company may become a wholly-owned subsidiary through an acquisition.
A majority-owned subsidiary is a company whose common stock is 51% to 99% owned by a parent company. The parent company may opt for majority ownership rather than an outright purchase in order to lower the costs and risks involved in the venture. The majority-owned company might then be called an affiliate, associate, or associate company.
- A wholly-owned subsidiary is a company whose common stock is 100% owned by a parent company.
- Wholly-owned subsidiaries allow the parent company to diversify their product lines, streamline management, and possibly reduce risk.
- By its nature, a wholly-owned subsidiary has no obligations to minority shareholders.
- The financial results of a wholly-owned subsidiary are reported on the parent company's consolidated financial statement.
Wholly Owned Subsidiary
Understanding a Wholly-Owned Subsidiary
Having a wholly-owned subsidiary may help the parent company maintain operations in diverse geographic areas and markets or related industries. These factors help the parent hedge against changes in the market or in geopolitical and trade practices.
Because the parent company owns all the shares of a wholly-owned subsidiary, there are no minority shareholders. The subsidiary operates with the permission of the parent company, which may or may not have direct input into the subsidiary’s operations and management. This may make it an unconsolidated subsidiary.
Despite being owned by another entity, a wholly-owned subsidiary may maintain its own management structure, clients, and corporate culture.
Nevertheless, when a company is acquired, its employees worry about layoffs or restructuring. That happens often, as one of the potential benefits to both companies is the opportunity to cut costs by consolidating certain departments.
Although subsidiaries are separate entities, they may share some executives or board members with their parent company.
Accounting for a Wholly-Owned Subsidiary
From an accounting standpoint, a wholly-owned subsidiary remains a separate company, so it keeps its own financial records and bank accounts and tracks its own assets and liabilities. Any transactions between the parent company and the subsidiary must be recorded.
Both Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS) require companies to report the financial data of their subsidiaries if the parent company is public. This information can be found in the parent company's consolidated financial statement.
Advantages and Disadvantages of a Wholly-Owned Subsidiary
A parent company has operational and strategic control over its wholly-owned subsidiaries. How it exercises that control has a great deal to do with the success or failure of the partnership.
When a company hires its own staff to manage the subsidiary, forming common operating procedures is generally less complicated than leaving the established leadership in place.
A parent company that acquires a subsidiary overseas or in an industry that's new to it might take a less heavy-handed approach, leaving current management in place.
Shared Policies and Processes Reduce Costs
The parent company is likely to apply its own data access and security directives for the subsidiary to lessen the risk of losing intellectual property to other companies. Using compatible financial systems, sharing administrative services, and creating similar marketing programs help reduce costs for both companies.
A parent company also directs how its wholly-owned subsidiary’s assets are invested.
Pitfalls for Parent Companies
Acquiring a wholly-owned subsidiary may force the parent company to pay a high price for the subsidiary's assets, especially if other companies are bidding on the same business.
There can be a difficult transition period as well. Establishing relationships with vendors and local clients takes time, which may hinder the operations of both companies. Cultural differences can become an issue when hiring staff for an overseas subsidiary.
Finally, the parent company assumes all the risk of owning a subsidiary. That risk may increase when local laws differ significantly from the laws in the parent company's country.
Tax Advantages of Wholly-Owned Subsidiaries
There are tax advantages for wholly-owned subsidiaries that may be lost if the parent company simply absorbs the assets of an acquired company.
When a parent company acquires a subsidiary by buying up that company's stock, the acquisition is a qualified stock purchase for tax purposes. Moreover, any losses by the subsidiary can be used to offset the profits of the parent company, resulting in a lower tax liability.
Sometimes, a subsidiary can do things that the parent company cannot do on its own. For example, a non-profit entity can create a for-profit subsidiary in order to raise revenue. While the subsidiary would be subject to federal income taxes, the parent company would remain exempt.
Pros and Cons of Wholly-Owned Subsidiaries
Tax-exempt organizations can have for-profit subsidiaries.
Parent companies can use losses from one subsidiary to offset taxes on profits from another.
The parent company inherits the acquired company's clients and good-will, which would be hard to recreate from scratch.
Running a subsidiary can be difficult if the acquired company has a different management culture.
Acquiring another company can be expensive, especially if other companies are competing for it.
Risks may be higher if the subsidiary is located in a different jurisdiction.
Subsidiary vs. Wholly-Owned Subsidiary
A subsidiary is a company whose stock is more than 50% owned by a parent company or a holding company. That gives the parent company a controlling interest in the subsidiary's operations, management, and profits. However, the subsidiary still has financial obligations to its minority shareholders.
A wholly-owned subsidiary is 100% owned by the parent company, with no minority shareholders.
Examples of Wholly-Owned Subsidiaries
Volkswagen AG is an example of a wholly-owned subsidiary system. The parent company wholly owns Volkswagen Group of America, Inc. and its brands, which include Audi, Bentley, Bugatti, and Lamborghini (wholly owned by Audi AG) as well as Volkswagen.
In addition, Marvel Entertainment and Lucasfilm are now wholly-owned subsidiaries of The Walt Disney Company. Starbucks Japan is a wholly-owned subsidiary of Starbucks Corp.
What Is the Difference Between a Holding Company and a Parent Company?
A holding company exists only as a legal entity to hold stock in other companies. A parent company has its own operations. For example:
Berkshire Hathaway is a holding company whose business is acquiring shares of other companies.
Pepsi is a parent company whose core business is producing Pepsi soft drinks but it owns several subsidiaries, including Tropicana, Gatorade, and Aquafina.
How Are Wholly-Owned Subsidiaries Accounted for?
Wholly-owned subsidiaries maintain separate accounts from their parent companies, but their finances are usually reported together.
If a public company has wholly-owned subsidiaries, the financial data for the subsidiaries will be reported alongside those of the parent on the company's consolidated balance sheets.
What Are the Tax Benefits of a Subsidiary?
A company with multiple subsidiaries can use the losses of one subsidiary to offset the profits of another, thereby reducing its overall tax bill.
Moreover, non-profit entities can establish for-profit subsidiaries without endangering their tax-exempt status.
The Bottom Line
Acquiring a wholly-owned subsidiary can be a relatively cost-efficient way for a company to expand its product line or its geographic reach. It may acquire a competitor, thus expanding its own market share, or invest in a part of its own supply chain, making its production process more efficient.
The difficulty comes after the deal is done. Combining some operations is efficient. Replacing some management may be necessary. But these changes must be made while avoiding disruption at the subsidiary as much as possible.