Wholly-Owned Subsidiaries

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Table of Contents

What Is a Wholly Owned Subsidiary?

A wholly-owned subsidiary is just any other firm owned by another corporation having 100% shares in the firm. Typically, a wholly-owned company is entirely controlled by the parent company. The parent company usually creates it for a specific purpose.

How Does a Wholly Owned Subsidiary Work?

In a common parent and subsidiary situation, there is a possibility of having multiple stakeholders. Since a parent company owns most stocks, the remaining are minority stakeholders.

Contrarily, in wholly-owned subsidiaries, there are no other stakeholders, major or minor. Since the parent corporation owns all the stocks, they are the only stockholders.

The parent corporation has a say in the day-to-day activities of the subsidiary as they own 100% of the common stocks. The parent or holding company elects the board of directors, steers the strategic business decisions, etc. The subsidiary functions on the parent company’s approval on different activities and management.

Key takeaways:

  • The wholly-owned subsidiary is a separate legal entity.
  • There is no restriction for wholly-owned subsidiaries to have their management structure, separate clients, or their own work culture.
  • Unlike other subsidiaries, the wholly-owned subsidiaries do not have a minority shareholder.
  • The accounts of a wholly-owned company should report the transactions between the company and the holding or parent firm.
  • A wholly-owned subsidiary is usually acquired to expand overseas.

Why do corporations opt for a wholly-owned subsidiary?

  • It helps the parent company operate in separate geographic areas.
  • When the parent firm wants to expand in different markets and industries.

Having a wholly-owned subsidiary reduces the costs and risks of new ventures. They can diversify a company’s portfolio or help it expand into new domains with limited risks. Setting up a wholly-owned subsidiary also increases a company’s profits which can later be invested in different assets or companies.

How do wholly-owned subsidiaries minimize the risks and costs?

The wholly-owned subsidiary is a separate legal entity. Therefore, the parent company is shielded if the subsidiary faces legal or financial issues.

The parent company is not entirely immune to problems, but it faces fewer risks and costs than if the wholly-owned subsidiary was the company’s part.

Moreover, if the subsidiary company is based overseas, it must follow the local laws and regulations. The company also benefits from being a local business. If the subsidiary fails, the parent company is cushioned significantly from the repercussions.

Does the parent company exercise absolute control over its wholly-owned subsidiary?

Even though the parent company has 100% stocks, that is not entirely true. The wholly-owned company can have an independent management structure, separate clients, and a work culture.

Also, the parent company need not be involved in all decisions and activities of the subsidiary. However, the wholly-owned subsidiary can function on its own.

It can make its own management decisions and operate independently. The subsidiary’s only ties with the parent company are to report on performance. Moreover, the decisions taken by the parent corporation are not valid if they conflict with local regulations.

Best practices:

  • It is easier for the parent company to hire new staff to manage the subsidiary and set up standard procedures to avoid complications. It makes taking over the company less complicated than taking over while retaining the senior leadership.
  • The parent company can exercise its security measures for the data and other aspects. This reduces the risks of losing intellectual property.
  • To make accounting easier for the parent and the subsidiary, having the same financial systems, marketing structures, and administrative procedures makes sense.

These measures help reduce costs for both the parent company and its subsidiary.

However, the parent company has a possible downside in acquiring a wholly-owned subsidiary. The parent company might have to pay a high price to purchase the company if several bidders are interested.

Understanding the Accounting Needs of a Wholly Owned Subsidiary

As the wholly-owned subsidiaries are legal entities, they must maintain separate records.

The wholly-owned subsidiary must have dedicated bank accounts to track its financial assets and liabilities. Moreover, the subsidiary’s financial records should show the transactions between the company and the holding or parent firm.

Let’s dive deeper into how accounting works for this type of subsidiary.

Stand-alone accounting

This is the first part of the accounting process.

  • Here, the subsidiary maintains its separate accounting records since it is an independent firm.
  • It will maintain bank accounts, assets, liabilities, financial statements, etc.
  • The subsidiary must track its personnel expenses with expenses it shares with the parent company.

Separate Books

These separate books are maintained by the parent and the subsidiary to monitor all the transactions between the two.

  • These are financial statements that record the purchases made by the subsidiary from the parent.
  • It can also reflect the purchase made by the parent from the subsidiary.
  • These separate books hold records of loans given by the parent company and the assets transferred by the subsidiary.

Consolidated financial statements

Even if both the companies are separate legal entities, the parent company owns all the common stocks of the wholly-owned subsidiary. Therefore, a financial statement showing the two companies and their finances as one are also crucial.

  • These statements show both companies as one and present their financial activities together.
  • A consolidated financial statement combines the parent company’s financials with the subsidiary’s statement.
  • In the consolidated financial statements, there is a separate section for the subsidiary’s transactions with the parent.
  • While combining two financial statements, you must eliminate the overlapping data of transfers, payments, and others. Keeping these transactions in the financial report leads to double-counting in the statement.

Now, let’s see how to create a consolidated statement:

  • For consolidation, the parent company and the subsidiary use two worksheets. One worksheet is for maintaining the balance sheet; the second worksheet is for the income sheet.
  • It removes any loans or payments made between the two entities inside the company.
  • The final step is subtracting the adjustment from the addition of the balance sheet and the income sheet.

Wholly Owned Subsidiary: Advantages and Disadvantages

Whenever multinational firms with superior technology or brand value enter a foreign country, looking to tap into the local market to its full advantage, the management typically prefers the route of wholly-owned subsidiaries.

Everything comes with its challenges and attributes. Naturally, a wholly-owned subsidiary has its pros and cons too. Let us consider the advantages and disadvantages of a wholly-owned subsidiary here:

Advantages

Mutual growth benefit

  • If a parent company ventures into a whole new business area, it will be tough to build a good market reputation from the ground and find new clients.
  • But, with a wholly-owned subsidiary in that business area, the parent company acquires clients and their reputation. It makes it easy to crack the market in less time and have a good standing.
  • The parent company is not the only one benefitting from this acquisition. Usually, the parent company is a big brand, and it immensely helps when the subsidiary becomes a part of the organization.
  • Associating with a big brand name also increases the valuation of the wholly-owned subsidiary.
  • As a wholly-owned subsidiary has no other stakeholder, the parent company can grow in terms of business diversification and delegated management.

Business consolidation

  • Often, a parent corporation has more than one subsidiary. All such subsidiaries might not be profit-making businesses.
  • The parent company can balance a company’s profits with the losses from the other when filing taxes.
  • If the parent company is a tax-exempt organization, it can acquire a wholly-owned subsidiary. This way, it can also earn profits, which the parent companies can further invest in other assets.

Make swift strategic decisions in the new market

  • Since the parent company owns 100% of the common stocks, controlling and management become easier.
  • The parent corporation can easily lay down company procedures and policies. It is also helpful in maintaining a similar work culture in both organizations to keep them in sync.
  • It is easy to make strategic decisions as the parent company is the only stockholder, and there are too many cooks.

Disadvantages:

We’ve listed the potential downsides of having a wholly-owned subsidiary.

  • The process of acquiring a company is not easy. It takes a lot of effort, time, and research on the procedure to close the deal.
  • Even though it is better than starting from scratch, it takes a while for the subsidiary’s operations to run smoothly. Investors, lenders, and vendors might take time to adjust to the new arrangements.
  • If it is an overseas subsidiary, then different laws and regulations apply. Therefore, the parent company may drop some projects if they don’t comply with the local laws.
  • An acquisition is not just something happening on paper. There are actual people and work cultures involved. So, cultural differences and workflow differences can become significant causes for concern. It also makes the subsidiary prone to political risks.
  • Setting up a wholly-owned subsidiary can be expensive as it demands paying for assets, especially if other companies are trying to acquire them.
  • Since a parent company holds 100% stocks, the company has to bear all the losses it faces.
  • As a wholly-owned subsidiary is a separate legal entity, it has to fill its own taxes, maintain track of employees and take care of other liabilities. However, this increases the cost.

Real-world Examples of Wholly Owned Subsidiaries

Now that we have a fair idea about what wholly-owned subsidiaries are let’s look at some popular subsidiaries.

Volkswagen AG and Volkswagen Group of America, Inc.

Here, Volkswagen AG is the parent company that wholly owns Volkswagen Group of America, Inc. It means that Volkswagen AG owns famous subsidiary companies like Bentley, Bugatti, Audi, Porsche, SEAT, Lamborghini, and Volkswagen. Interestingly Lamborghini is wholly owned by Audi AG.

Marvel Entertainment and The Walt Disney Company

Since 2009, Marvel Entertainment has been a wholly-owned subsidiary of The Walt Disney Company. Therefore, all the Marvel movies are a part of The Walt Disney Company. That’s not all. Pixar, Lucasfilm, and other notable companies also come under The Walt Disney Company banner.

Starbucks Japan and Starbucks Corp.

Starbucks has become synonymous with coffee. Starbucks Japan is an excellent wholly-owned subsidiary example. We may usually assume Starbucks everywhere to be the same. However, Starbucks Japan is a separate entity owned by the Starbucks Corp. Whereas in India, Starbucks Corporation is in a 50:50 joint venture with Tata Consumer Products.

Subsidiary vs. Wholly Owned Subsidiary

It is clear now that regular subsidiaries and wholly-owned subsidiaries are different terms and treated as separate legal entities.

One of the differentiating factors in the subsidiary vs. a wholly-owned subsidiary debate is the percentage of shares owned. However, normal and wholly-owned subsidiaries are bound by an area’s local laws and regulations.

SubsidiaryWholly-owned subsidiary
In a normal subsidiary, the parent company, owns the majority of the shares, i.e., 51% to 99%.The parent corporation owns 100% of the common stocks for wholly-owned subsidiaries.
Now, for normal subsidiaries, even if the parent company has voting interests, there are other minor shareholders.In a wholly-owned subsidiary, there are no stakeholders as the parent company owns entire stocks.
Subsidiaries have financial obligations to meet.Wholly-owned subsidiaries have no such obligations. The parent company can single-handedly look after all the management and financial decisions of the subsidiary as there are no other stakeholders.
A regular subsidiary has its separate day-to-day functions and its own management team.In a wholly-owned subsidiary, the daily operations are entirely directed by the parent company.

Wrapping up

In a nutshell, a wholly-owned subsidiary is a company whose 100% shares are owned by a different organization. The parent company can make any strategic, management, and board decision, provided it does not conflict with the local laws and regulations.

A wholly-owned subsidiary is usually acquired to expand overseas or venture into new business niches. The wholly-owned subsidiaries bring their clients and market reputation from the field, giving the parent firm a headstart to expand in newer areas. It also increases the subsidiary’s valuation since it remains associated with a big banner.

All in all, both companies benefit significantly from this acquisition if they properly navigate the challenges involved.

If the previous leadership remains, it might get difficult to set up a new management style and system. Subsidiaries may have a tough time adjusting to the new paradigm. Also, cultural differences might be tricky to overcome.

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