What is a wholly owned subsidiary and how does it work?

When a company is owned either partially or completely by an outside entity, it’s known as a subsidiary. The level of ownership affects the name of the subsidiary and the way it operates. When a company owns less than 50% of the smaller business, that is known as an equity investment. The smaller business has more say in the decision-making process, but it doesn’t fully exercise control over the parent company.

However, when a company owns between 51% to 100% of the smaller business, then it has a controlling interest, meaning that it can dictate all final decisions to benefit the smaller business. This is known as being a parent company. 

When the company owns 100% of the shares of its daughter company, that second company is known as a wholly owned subsidiary. This represents the subsidiary being fully controlled by the owning company. In this case, there are no minority shareholders, and stock isn’t publicly traded. 

Is a wholly owned subsidiary its own company?

A wholly owned subsidiary is considered its own distinct legal entity. It will have its own operations, its own structure, and its own board of directors. A parent company may exert total control over a wholly owned subsidiary, but each company has its own liabilities, tax requirements, and leadership.

In a wholly owned subsidiary, the business is typically controlled directly by the parent company. Most commonly, the daily operations of a wholly owned subsidiary are directed by the parent company, rather than controlled by management. 

Do wholly owned subsidiaries have their own accounting?

Each wholly owned subsidiary is its own distinct business and is typically a completely different entity from its parent company. This means accounting services can be completed by the subsidiary itself, from payroll to revenue reports.   

Some parent companies find it more beneficial to consolidate accounting between the parent company and its subsidiary. Consolidating a wholly owned subsidiary involves combining all relevant financial data between parent and subsidiary when calculating the parent company’s finances.

Are there limitations to international subsidiaries? 

The only limitations are that subsidiaries are required to strictly follow and comply with any local laws and regulations in the countries where they operate any sort of business. Some parent companies even change their own policies, or even the policies of their subsidiaries, to adapt to the country’s laws in order to operate safely.

Advantages of a wholly owned subsidiary

Owning and controlling a wholly owned subsidiary is an excellent way for a business to break into a new market, especially those in countries other than where the parent company operates. Many countries have a host of regulations that make establishing a new entity difficult, especially from the outside. Buying out a company that already has the necessary permits and approvals can ultimately be much faster than starting a new company from scratch. 

As opposed to partially owned subsidiaries, wholly owned subsidiaries can be fully and entirely controlled by their parent companies. This means that the parent company is in charge of hiring, daily operations, asset investment, project management, and any other task related to the company. This allows the holding company to streamline the subsidiary’s operations to match the greater company’s needs and desires.

Large companies often target businesses that are already part of the parent company’s supply chain in order to gain control of proprietary technologies or techniques and adjust manufacturing to meet the parent company’s process. This allows a parent company to get a competitive advantage in their field or even cut competitors out of key components. 

Wholly owned subsidiaries are also a prime source of tax advantages for a parent company. In many countries, parent and subsidiary companies can consolidate their financials, often leading to better tax rates for the parent company. There may even be additional tax benefits simply for owning a subsidiary. In some cases, gains made via one subsidiary can be negated by losses from a second subsidiary, minimizing the amount of income that is taxed.

Disadvantages of a wholly owned subsidiary

One major issue with wholly owned subsidiaries is that they can be extremely expensive to acquire. It’s common for potential parent companies to find themselves embroiled in a bidding war, especially if the future subsidiary produces goods or owns assets crucial to either business’s strategy. 

After acquiring a business, the parent company also takes on all of that subsidiary’s risk and liability. This can be a financial burden, especially when the wholly owned subsidiary operates outside the parent company’s normal purview or in a new country.

Finally, the acquisition of a new company can cause stress on the daughter company, especially if the parent company has a drastically different culture than its new subsidiary. Culture tensions can lead to a large exodus of employees who don’t want to adjust to a new culture or who find themselves no longer invested in the company culture. This loss of talent can be costly, and it will affect morale. Developing a strategy that accounts for these challenges can mitigate the risk of entering into this type of relationship.

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.