What is a partially owned subsidiary?

A partially owned subsidiary is a company where a parent company owns more than 50% but less than 100% of its shares, giving it a majority of voting power or outstanding equity interests. This ownership structure gives the parent company control while allowing other investors to maintain minority stakes.

So, what makes this different from other ownership structures? It comes down to control and ownership percentages. When a company owns less than 50% of another business, that's typically an equity investment—they have influence but not control.

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This guide explores the key aspects of partially owned subsidiaries, from understanding parent company relationships and ownership structures to navigating accounting, international operations, and strategic benefits—helping you make informed decisions about corporate growth and expansion.

What is a parent company?

A parent company is a business that owns a controlling interest (typically more than 50%) in another company. The relationship breaks down like this: when the parent owns 51-99% of the subsidiary's shares, it's a partially owned subsidiary. When the parent owns 100% of the shares, it's called a wholly owned subsidiary.

Can a parent company have multiple subsidiaries?

A holding company is generally allowed to own controlling interests in as many businesses as it wants, so long as it can afford to purchase enough shares. When a holding company owns two or more subsidiaries, the subsidiaries are known as "sister companies." A parent company may also refer to its subsidiaries as "daughter companies."

Partially owned vs. wholly owned subsidiaries

What's the difference between partially owned and wholly owned subsidiaries? It comes down to control and decision-making power:

Partially owned subsidiary:

• Parent company owns 51-99% of shares

• Minority shareholders have a voice in major decisions and may require their prior approval for actions like material acquisitions or dispositions over a certain threshold.

• More complex decision-making process

• Shared financial responsibility

Wholly owned subsidiary:

• Parent company owns 100% of shares

• Complete control over operations and strategy

• Simplified decision-making

• Full financial responsibility

Is a partially owned subsidiary its own company?

Yes, a partially owned subsidiary operates as its own distinct legal entity. Here's what that means in practice:

• Separate legal structure: Own operations, board of directors, and management team

• Independent liabilities: Separate tax requirements and legal responsibilities

• Reporting hierarchy: Reports to its own management first, then to the parent company

This separation provides some protection for the parent company while maintaining operational control.

Who does the accounting for a partially owned subsidiary?

Although a parent company may own multiple smaller companies, each partially owned subsidiary is a whole, distinct business of its own. That means that all the subsidiary's accounting, from payroll to revenue reports, can be done by the subsidiary itself. 

However, some companies may conduct their internal financial reports by consolidating numbers between parent and subsidiary. The consolidation of a partially owned subsidiary is quite common; under US GAAP, this is required when a company has a controlling financial interest and involves combining all relevant financial data between parent and subsidiary when calculating the parent company's finances.

How do international subsidiaries work?

When a parent company has subsidiaries that are incorporated in another country, things can get a bit complicated. Generally, a subsidiary is required to conform to all the laws and regulations of the country where it's incorporated and where it operates. This can mean that policies have to be adapted between the parent company and subsidiary to ensure compliance in all relevant countries.

What are the benefits of partially owned subsidiaries?

Why do companies choose partially owned subsidiaries? The benefits are compelling:

• Tax advantages: Consolidate financials for better tax rates, offset gains with losses, and, as the IRS notes, allocate benefits like the $250,000 accumulated earnings credit across subsidiaries.

• Risk management: Compartmentalize liability by using subsidiaries for risky ventures

• Cultural flexibility: Maintain different company cultures suited to specific markets or business types

• Market expansion: Enter new markets cost-effectively by acquiring existing companies rather than starting from scratch

Are there any downsides to partially owned subsidiaries?

What are the potential downsides? Here are the key challenges to consider:

• Limited control: Minority shareholders can influence decisions that conflict with parent company goals, for example, by contractually ensuring their designees are elected to the Board of Directors.

• Complex decision-making: Dual chains of command can slow down important business decisions

• Increased costs: Higher legal fees, complex tax filing requirements, and additional administrative overhead

Simplifying global expansion with Oyster

Establishing a subsidiary is a common strategy for global expansion, but it comes with significant legal, financial, and administrative burdens. For companies looking to hire international talent without the complexity of setting up a new entity, there's a more straightforward path.

An Employer of Record (EOR) like Oyster allows you to hire, pay, and care for employees anywhere in the world, compliantly. We handle the local legal requirements, payroll, and benefits, so you can focus on building your global team. If you're ready to access a worldwide talent pool without the operational headaches of a subsidiary, it might be time to start hiring globally with a trusted partner.

FAQs

What does partially owned mean?

Partially owned means that a parent company owns a majority of another company's shares—more than 50% but less than 100%. This gives the parent company a controlling interest, but it also means there are other minority shareholders with a stake in the company.

Can a parent company own less than 50% of a subsidiary?

Generally, no. If a company owns less than 50% of another, it is typically considered an 'equity investment' or an 'associate company,' not a subsidiary. The key element of a subsidiary relationship is control, which is usually established by owning more than 50% of the voting shares, though for certain U.S. tax consolidation purposes, the IRS requires ownership of at least 80% of the stock.

Is a joint venture the same as a partially owned subsidiary?

No. A partially owned subsidiary has one parent company with controlling ownership, while a joint venture involves multiple independent companies creating a new shared entity together.

Disclaimer: This blog and all information in it is provided for general informational purposes only. It does not, and is not intended to, constitute legal or tax advice. You should consult with a qualified legal or tax professional for advice regarding any legal or tax matter and prior to acting (or refraining from acting) on the basis of any information provided on this website.