What is a wholly-owned subsidiary?
A wholly-owned subsidiary is a corporation whose common stock belongs to another business. A business may acquire another business to become a wholly-owned subsidiary. A corporation is a majority-owned subsidiary if a parent company owns 51% to 99% of the common stock. To save expenses and minimize risks, the parent firm may acquire a majority stake in the initiative instead of buying it altogether. The majority-owned business may subsequently be called an associate, affiliate, or associate company.
Comprehending a Completely-Owned Affiliate
A wholly-owned subsidiary might make it easier for the parent business to continue operating in various markets, geographies, and adjacent sectors. These elements aid in the parent company’s hedging against trade, geopolitical, or market changes.
There are no minority shareholders in a wholly-owned subsidiary since the parent business owns every share. The parent firm, which may or may not have direct influence over the management and operations of the subsidiary, grants a license for the subsidiary to operate. It could become an unconsolidated subsidiary as a result.
A wholly-owned subsidiary may continue to have its clientele, corporate culture, and management structure while another company controls it.
However, employees of a firm that is bought worry about restructuring or layoffs. That occurs often, allowing both businesses to save expenses by combining specific divisions.
Subsidiaries may have certain executives or board members in common with their parent firm while being independent legal organizations.
Keeping Track of a Fully-Owned Subsidiary
Like independent businesses, wholly-owned subsidiaries maintain their accounting records, bank accounts, and asset and liability tracking systems. Every transaction between the parent business and the subsidiary has to be documented.
If the parent company is open to the public, then corporations must publish the financial information of their subsidiaries under both International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP). The consolidated financial statement of the parent firm contains these data.
The benefits and drawbacks of having a wholly-owned subsidiary. A parent firm controls the operations and strategy of its wholly-owned subsidiaries. The partnership’s success or failure largely depends on how it uses that power.
Establishing standard operating procedures is usually easier when a firm employs its employees to run the subsidiary than when leaving the current leadership in place.
When a parent firm purchases a subsidiary abroad or in a newly established business, it may choose a less interventionist strategy and retain the present management team.
Costs are Reduced by Shared Policies and Procedures
To reduce the possibility of losing intellectual property to rival businesses, the parent company will probably enforce its own security and data access policies for the subsidiary. Both firms may save expenses by using comparable marketing strategies, pooling administrative resources, and implementing compatible financial systems.
The parent business also controls the investments made using the assets of its wholly-owned subsidiary.
Obstacles for Parent Businesses
If multiple businesses are bidding for the same firm, acquiring a wholly-owned subsidiary may require the parent company to pay a premium for the subsidiary’s assets.
There may also be a challenging phase of transition. Building relationships with local clients and vendors takes time, which could interfere with both businesses’ operations. Cultural differences may need to be clarified when recruiting employees for a foreign subsidiary.
Lastly, the parent company takes every risk associated with owning a subsidiary. When local laws diverge significantly from those in the nation of the parent company, that risk could rise.
Benefits of Wholly-Owned Subsidiaries for Taxation
If the parent business only absorbs the assets of an acquired company, wholly-owned subsidiaries may lose their tax benefits.
For tax purposes, a parent company’s purchase of a subsidiary through stock purchases qualifies as an approved stock purchase. Additionally, any losses incurred by the subsidiary can reduce the tax obligation by offsetting the parent company’s profits.
Sometimes, a subsidiary can accomplish things the parent business cannot do independently. A non-profit organization could establish a for-profit subsidiary to generate money. The parent firm would remain free from federal income taxes, even if the subsidiary did.
Benefits and Drawbacks of Fully-Owned Subsidiaries
Pros
- For-profit subsidiaries are permitted for tax-exempt organizations.
- Parent corporations may utilize losses from one company to offset taxes on earnings from another.
- The parent firm acquires the purchased company’s clientele and goodwill, which would be impossible to build from the start.
Cons
- Running a subsidiary might be challenging if the acquired firm has a distinct management culture.
- Acquiring another firm may be costly if other companies bid for it.
- Risks may be increased if the subsidiary is situated in a separate jurisdiction.
Subsidiary vs. Wholly-Owned Subsidiary
A subsidiary is a company whose stock is more than 50% owned by a parent or holding company. That gives the parent business a controlling stake in the subsidiary’s operations, management, and earnings. However, the subsidiary still has financial obligations to its minority owners.
The parent company owns a wholly-owned subsidiary, which has no minority shareholders.
Illustrations of Fully-Owned Affiliates
Volkswagen AG is an example of a wholly-owned subsidiary structure. All of Volkswagen Group of America, Inc.’s brands, including Volkswagen, Audi, Bentley, Bugatti, and Lamborghini (which Audi AG owns in its entirety), belong to the central business.
In addition, Marvel Entertainment and Lucasfilm are now wholly-owned subsidiaries of The Walt Disney Company. A wholly owned subsidiary of Starbucks Corp. is Starbucks Japan.
What Is the Difference Between a Holding Company and a Parent Company?
A holding company operates simply as a legal entity to hold shares in other firms. A parent business does business on its own. For instance:
Acquiring shares in other firms is the business of holding company Berkshire Hathaway.
In addition to its primary business of manufacturing Pepsi soft drinks, the parent firm Pepsi owns several subsidiaries, such as Tropicana, Gatorade, and Aquafina.
How Do Completely Owned Subsidiaries Get Counted?
Although wholly-owned subsidiaries and their parent firms have separate accounts, they often disclose their finances jointly.
If a public company has wholly-owned subsidiaries, the financial data for the subsidiaries will be reported alongside those of the parent company on the company’s consolidated balance sheets.
What tax advantages do subsidiaries offer?
A company with multiple subsidiaries can use one subsidiary’s losses to offset another’s profits, thereby reducing its overall tax bill.
Moreover, non-profit entities can establish for-profit subsidiaries without endangering their tax-exempt status.
The Bottom Line
Acquiring a wholly-owned subsidiary can be a relatively cost-efficient way for a company to expand its product line or its geographic reach. It may develop a competitor, thus expanding its market share, or invest in a part of its supply chain, making its production process more efficient.
The difficulty comes after the deal is done. Combining some operations is efficient. Replacing some management may be necessary. But these changes must be made while avoiding disruption at the subsidiary as much as possible.
Conclusion
- A wholly-owned subsidiary is a company whose common stock is 100% owned by a parent company.
- Wholly-owned subsidiaries allow the parent company to diversify its product lines, streamline management, and reduce risk.
- By its nature, a wholly-owned subsidiary has no obligations to minority shareholders.
- The financial results of a wholly-owned subsidiary are reported on the parent company’s consolidated financial statement.
