Definition
A wholly owned subsidiary is a business entity of which 100% of the stock is owned by another firm, the parent company. As the sole shareholder, the parent company has control over the subsidiary’s operations and policies. Despite being controlled, the subsidiary operates independently of the parent company with its own senior management structure.
Key Takeaways
- A wholly-owned subsidiary is a company completely owned by another company (the parent company). This ownership is constituted when the parent company acquires 100% of the subsidiary’s shares. This allows the parent company to exercise full control of operations.
- The primary advantage of a wholly-owned subsidiary is the parent company’s power to achieve business objectives and operational efficiencies without needing to consider other shareholders’ interests. This can speed up implementation of decisions, foster targeted growth, simplify management processes, and maintain secrecy in certain strategic moves.
- On the downside, wholly owning a subsidiary can increase the financial burden and risk on the parent company. This is because all losses are born by the parent company. Establishing and managing a wholly-owned subsidiary can also consume significant management time and can become complex if the subsidiary is located in a foreign country with different business laws and practices.
- Multinational Corporations
- Parent Company
- Business Acquisition
- Corporate Governance
- Consolidated Financial Statements
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Importance
The finance term “Wholly Owned Subsidiary” is important because it represents a company that is completely owned by another, parent company.
The primary company owns 100% of the subsidiary’s stock, giving it full control over the business decisions, operations, and financial resources of the subsidiary.
This scenario provides strategic advantages to the parent company, including tax benefits, financial consolidation, and a broadened geographical scope.
In addition, the parent company can direct the subsidiary’s methods to align with its overall business objectives, while the subsidiary can take advantage of the parent company’s resources and brand credibility.
This maintains a symbiosis that can ensure long-term growth and success for both entities.
Explanation
A wholly owned subsidiary is a key strategic tool leveraged by corporations seeking to expand their operations, access new markets, or diversify their holdings. The parent company typically uses this structure to acquire 100% of the shares of another company, which enables them to exercise complete control over the subsidiary’s operations. This acquisition strategy helps corporations streamline operations, eliminate competition and achieve economies of scale.
Further, possessing full control allows for a seamless integration of the subsidiary and parent company’s structures, strategies, and resources. Wholly owned subsidiaries also benefit parent companies by providing a way to enter foreign markets while mitigating potentially associated risks. When a company seeks to expand abroad, it often purchases an existing company in the respective country.
By doing so, the parent company can bypass many of the challenges associated with entering a new market, such as navigating unfamiliar laws, regulations, and cultural dynamics. The subsidiary operates under the oversight of the parent company but still retains its legal status, thus providing a strategic shield for the parent company against potential risks and liabilities in the new market. Furthermore, a wholly owned subsidiary can also provide tax benefits and protect parent companies from certain liabilities by acting as a separate legal entity.
Examples of Wholly Owned Subsidiary
The Walt Disney Company and Pixar: In 2006, The Walt Disney Company purchased Pixar, the animation studio. This acquisition made Pixar a wholly owned subsidiary of Disney, with the media giant having complete control and 100% stake in the company.
Alphabet Inc. and Google: Google was restructured under a new parent company, Alphabet Inc., in
Google is a wholly owned subsidiary of Alphabet, which owns all of Google’s common equity, thus giving them full control of Google’s ventures.
Facebook and WhatsApp: In 2014, Facebook acquired the messaging app WhatsApp for almost $19 billion USD. This acquisition made WhatsApp a wholly owned subsidiary of Facebook, providing Facebook control of the app’s operations and innovations.
FAQ: Wholly Owned Subsidiary
What is a Wholly Owned Subsidiary?
A wholly owned subsidiary is a company whose entire stock is held by another company, known as the parent company. The parent company effectively has full control and ownership over the subsidiary’s assets and operations.
How is a Wholly Owned Subsidiary created?
A wholly owned subsidiary is often created by the parent company acquiring another company through purchase or share transfer. It can also be created when the parent company builds a new operation from scratch.
What’s the difference between a Subsidiary and a Wholly Owned Subsidiary?
The main difference between a subsidiary and a wholly owned subsidiary lies in the level of control held by the parent company. In a subsidiary, the parent company owns more than half of the subsidiary’s stock. In a wholly owned subsidiary, the parent company owns all of the subsidiary’s stock.
What are the advantages of having a Wholly Owned Subsidiary?
The parent company has full control over the operations, business decisions, and profits of a wholly owned subsidiary. The parent company also benefits from risk absorption, geographical diversification, and intellectual property protection.
Are there any disadvantages to having a Wholly Owned Subsidiary?
Potential drawbacks include high costs, cultural and legal differences particularly for subsidiaries in different countries, and the possibility of diluting the parent company’s focus by managing diverse business operations.
