What is a wholly owned subsidiary? How it works and examples

When it’s time to expand into new markets and diversify their operations, scaling companies have options. But along with every opportunity comes a challenge: How do you structure local operations that stay nimble, but make it easy for parent companies to follow standards across different countries and foreign markets? 

Some companies expand through joint ventures or mergers and acquisitions. Others absorb or form separate legal entities called wholly owned subsidiaries, which give parent companies full control. 

Here’s a guide to what a wholly owned subsidiary is, the advantages and disadvantages of establishing subsidiary companies, and how Oyster makes international expansion easier.

What is a wholly owned subsidiary?

A wholly owned subsidiary is an entity whose parent company (sometimes called holding company) owns 100% of its stock, giving it full control. 

Wholly owned subsidiaries operate independently with their own management structure and local tax and compliance obligations. But while the subsidiary is legally and operationally separate, it’s tied to the parent and consolidated in financial reporting. 

In a partially owned subsidiary, the parent company owns less than 100% of the subsidiary. That means the subsidiary has to collaborate on some strategic decisions and share profits with minority shareholders, but it has more independence.

5 characteristics of wholly owned subsidiaries

Wholly owned subsidiaries have several characteristics that are sometimes confusing or conflicting. Here’s what companies looking to enter new markets should understand:

1. 100% ownership by the parent company: The parent company owns all outstanding shares and has all voting rights. This gives the parent and its board of directors control to make strategic decisions for its subsidiary. 
2. Separate legal entity: Even though the parent company has control over wholly owned subsidiaries, the law sees the subsidiary as legally separate. That means the subsidiary can enter contracts and assumes all legal liability for its business independent from corporate. 
3. Consolidated financial reporting: The wholly owned subsidiary’s financial reporting gets combined with the parent company in one consolidated report where required by law and government agencies, such as the Securities and Exchange Commission (SEC) in the United States. Consolidated financial statements make sure shareholders understand the entire corporation’s situation. 
4. Control over policies, executives, and strategy: Even when the subsidiary has its own management team, the parent company can appoint the board of directors and make strategic decisions to make sure what’s happening aligns with corporate’s goals. 
5. Used for domestic and foreign expansion: Parent companies often create wholly owned subsidiaries to distinguish between different businesses, which is helpful when expanding into different markets with different standards. Having a subsidiary with its own local HR and legal teams helps assert compliance with differing domestic and international regulations.

Accounting and tax considerations

Under Generally Accepted Accounting Principles (GAAP) in the United States and International Financial Reporting Standards (IFRS) globally, parent companies have to adhere to strict financial reporting requirements when establishing and operating wholly owned subsidiaries. 

The parent’s financial statements must show all of the subsidiary’s assets, liabilities, costs, and revenue. And taxes get complicated. The wholly owned subsidiary pays taxes in its local jurisdictions as a separate local entity. The parent company might also be able to use gains from one of its subsidiaries to offset losses from another when reporting consolidated results. 

Something important to know is that when the parent company and wholly owned subsidiary conduct transactions between one another (like selling goods or services, lending money, or licensing intellectual property), they must follow transfer pricing regulations. This means transactions have to follow market-based pricing—the same pricing they would in transactions with unrelated third parties. Because the two entities are legally related, they can’t technically execute true “arm’s length” transactions. The arm’s length principle ensures that the corporation isn’t shifting profits to low-tax countries, an issue that’s on the radar of international regulators. 

Advantages of a wholly owned subsidiary

Wholly owned subsidiaries provide benefits—strategic, operational, financial—for companies diversifying their businesses and going multinational. 

Tax benefits

The parent company has to consolidate their financial statements, so that means they can combine revenue and losses across subsidiaries. They’re often allowed to use operational losses from one subsidiary to decrease the tax liability from gains in another subsidiary. 

Diversification

If a company wants to enter a new market or start a new product line, a wholly owned subsidiary allows them to diversify while isolating financial risk. By treating the new venture as separate, the parent can focus on corporation-wide operational goals, tactically hedging against market-specific volatility. 

Full control

Even though wholly owned subsidiaries generally have their own management teams, the parent company doesn’t have to ask permission—from minority shareholders or a separate board—to make quick strategic decisions that can benefit the larger organization. 

Brand protection

Because they retain full control over their subsidiaries, parent companies can protect their own brand more easily. They can enforce uniform standards for marketing, hiring, and other public-facing activities to boost consistency and reduce the risk of reputational harm. 

Market entry opportunities

It’s typical for corporations to acquire or establish wholly owned subsidiaries to enter new markets because purchasing an existing company means less work. While it’s more complicated to start something new instead of purchasing, it’s still easier for a corporation to establish separate supply chains and tailor its offerings to the foreign market independently. The parent maintains centralized control, but has the flexibility to defer to on-the-ground operational knowledge. 

Disadvantages of a wholly owned subsidiary

For many companies, particularly businesses without a multinational presence to begin with, acquiring or starting a wholly owned subsidiary can be more trouble than its worth. Here are some of the downsides:

High acquisition and establishment costs

Buying an existing business and making it a wholly owned subsidiary, or forming a legal entity in a new market, is often the most costly and time-consuming path to expansion—especially internationally. With capital requirements, legal fees, and compliance with local government regulations, parent companies take on extensive financial risk. 

Cultural and operational complexity

Differences in language and business practices requires an additional investment of time and resources. It’s hard to exert this control from afar, particularly when a parent company faces resistance from the subsidiary’s workforce and lacks knowledge of local protocols, customs, and regulations. 

Compliance risks

Managing the differences between states in the US is difficult enough. Add in differences between countries around the world and regional distinctions within nations and you have a compliance headache. Wholly owned subsidiaries, while controlled by corporate, still have to follow all local labor and tax laws, and without significant local expertise on the ground, having a foreign subsidiary presents obstacles on the way to growth and expansion. 

Liability concentration

The separation between the parent and subsidiary sometimes gets blurry. If a wholly owned subsidiary gets sued or loses money, the parent company is on the hook financially, even if the situation is seemingly independent. 

Real-world examples of wholly owned subsidiaries

Here are some examples of successful wholly owned subsidiaries:

Marvel and Lucasfilm (owned by the Walt Disney Company)

The Walt Disney Company owns 100% of Marvel Entertainment and Lucasfilm, making them classic examples of wholly owned subsidiaries functioning independently as creative entities. Even as independent ventures, Marvel and Lucasfilm are fully aligned with the Walt Disney Company’s corporate strategy. Disney has full control over both subsidiaries, creating synergy that helps maintain a consistent branding across its entertainment landscape.  

Porsche and Audi (under Volkswagen Group)

The Volkswagen Group owns Porsche and Audi—a fact that many consumers don’t know or wouldn’t guess. The three auto brands have distinct identities with consumers, but the parent company and Porsche and Audi subsidiaries share technological and operational platforms to help achieve economies of scale. 

An alternative to wholly owned subsidiaries with Oyster

While wholly owned subsidiaries offer advantages, they’re complex to establish and maintain—especially across multiple jurisdictions. The high costs, compliance risks, and burden of establishing separate legal entities in foreign markets can outweigh the positives for rapidly scaling companies. 

When you’re growing fast, the last thing you need are international administrative barriers to slow you down. That’s what Oyster is for.

Oyster helps companies expand globally without needing to set up wholly owned subsidiaries in every country. As an Employer of Record (EOR), Oyster can help you hire and pay employees around the world without the need for legal entities. Using an EOR saves time, money, and streamlines compliance, giving you local expertise on the ground wherever you want to do business. 

If you want to expand your workforce and hire top talent globally, explore Oyster’s Strategic Partnership page to see how it supports compliant, scalable global hiring.  

FAQ

Is a wholly owned subsidiary its own company?

A wholly owned subsidiary is a separate legal entity. It’s distinct from its parent company in that it assumes its own contractual and operational liability, but the parent still maintains strategic decision making power over its subsidiaries. 

Do wholly owned subsidiaries have their own accounting?

Yes, wholly owned subsidiaries maintain their own bookkeeping to manage local finances, taxes, and compliance. From there, the parent company must report its subsidiaries’ financial results in consolidated statements. 

Are there limitations to international subsidiaries?

Foreign markets create obstacles to establishing wholly owned subsidiaries, including local board of directors and capital requirements. In addition, subsidiaries have to adhere to local and regional labor and tax laws, raising potential compliance issues. Establishing an EOR is a great way to develop a foreign presence with few barriers to entry and execution.