What Is a Wholly-Owned Subsidiary? Definition and Examples

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• May 29, 2024
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Subsidiaries are separate and distinct legal entities from their parent companies, which is reflected in the independence of their liabilities, taxation, and governance. If a parent company owns a subsidiary in a foreign land, the subsidiary must follow the laws of the country where it is incorporated and operates. There are certain exemptions for the wholly-owned subsidiary company in legal and tax laws to encourage new investment by the parent company and create more companies to increase employment. The parent company will have a degree of control over both tiers of subsidiary companies. As the major shareholder, it will hold direct control of a first-tier subsidiary.

This information can be found in the parent company’s consolidated financial statement. From an accounting standpoint, a wholly-owned subsidiary remains a separate company, so it keeps its own financial records and bank accounts and tracks its own assets and liabilities. Any transactions between the parent company and the subsidiary must be recorded. Although subsidiaries are separate entities, they may share some executives or board members with their parent company. One well-known example is Google’s parent company, Alphabet Inc., which wholly owned subsidiary meaning operates several wholly-owned subsidiaries, including Google LLC.

Pepsi is a parent company whose core business is producing Pepsi soft drinks but it owns several subsidiaries, including Sodastream, Gatorade, and Aquafina. The parent company wholly owns the automotive brands Audi, Bentley, Porsche, and Lamborghini, as well as Volkswagen. When a parent company acquires a subsidiary by buying up that company’s stock, the acquisition is a qualified stock purchase for tax purposes. Moreover, any losses by the subsidiary can be used to offset the profits of the parent company, resulting in a lower tax liability.

This means that policies and procedures may not align with those of the parent. Acquisitions may be costly to execute and there may be inherent risks (geopolitical, currency, trade) that come with doing business in another country. Now he can present a person say Mr. B, on his behalf whose name shall be presented on register of members but indirectly he will be the owner(beneficial owner) and will be controlling company. The Securities and Exchange Commission (SEC) requires publicly listed companies to disclose their subsidiaries, including when they acquire or dispose of a subsidiary.

These factors help to cope up with the changes in the market or geopolitical and trade practices. As a subsidiary functions as a separate entity, it usually has its own management team and CEO. However, the parent company will get a significant say in who runs the company and who sits on its board of directors. An unconsolidated subsidiary is a subsidiary with financials that are not included in its parent company’s statements. Ownership of unconsolidated subsidiaries is typically treated as an equity investment and denoted as an asset on the parent company’s balance sheet. For regulatory reasons, unconsolidated subsidiaries are generally those in which a parent company does not have a significant stake.

It can elect the board of directors and influence strategic business decisions when required. Using this influence, the parent company can exercise indirect control of the second-tier subsidiary. It is a strategic corporate structure that can facilitate growth and flexibility for businesses operating in a complex and dynamic marketplace. A wholly-owned subsidiary is a legally separate entity that is entirely owned and controlled by another company, known as the parent company. This means that the parent company owns 100% of the subsidiary’s shares, giving it full control over its operations, management, and decision-making processes. As the parent company owns all the shares of a wholly-owned subsidiary, minority shareholders are not present.

What are sister companies?

Hence, this is not a wholly-owned subsidiary company since ABC does not control 100% of the company’s share capital. To become a wholly-owned subsidiary, the parent company ABC needs to acquire the 1% minority shares from the public to gain full control over the company’s operations. Subsidiaries and wholly-owned subsidiaries are companies that are at least partially under the control of another company. Both types of companies are owned by another entity, called the parent or holding company, but the owning company’s stake is different for each type. This means the individual organizations pay tax and debt, limiting shared liabilities between the companies.

What is the purpose of a subsidiary company?

If the entire subsidiary company is owned by the parent corporation, this is known as a wholly owned subsidiary. This gives the parent corporation a major influence on the company’s ongoing operations. Direct control of who sits on the board of directors helps define the aims and strategic decisions made by the subsidiary company.

1. As the major shareholder, parent companies will have the deciding vote when electing the directors in the boardroom.
2. Although a parent company has operational and strategic control over its wholly-owned subsidiaries, and acquired subsidiary with a strong operating history overseas typically has less overall control.
3. Berkshire Hathaway (BRK.A and BRK.B) is a multinational holding corporation.
4. A wholly-owned subsidiary, on the other hand, is fully owned by the parent.
5. A parent company only needs to own more than 50% of another company’s stock for that company to be considered a subsidiary.

Shared Policies and Processes Reduce Costs

Despite being owned by another entity, a wholly-owned subsidiary may maintain its own management structure, clients, and corporate culture. Subsidiaries typically operate on their own and follow their own structure, but they benefit from the resources and connection to their parent company. Learn the definition and discover real-life examples of a wholly-owned subsidiary in the finance industry. Just upload your form 16, claim your deductions and get your acknowledgment number online.

That gives the parent company a controlling interest in the subsidiary’s operations, management, and profits. However, the subsidiary still has financial obligations to its minority shareholders. In this case, there are 1% minority shareholders in the company which has not been acquired.

For example, PepsiCo isn’t just a company; it’s a conglomerate that owns more than one subsidiary company, including Mountain Dew, Frito-Lay and even Quaker Foods. The parent company is likely to apply its own data access and security directives for the subsidiary to lessen the risk of losing intellectual property to other companies. Using compatible financial systems, sharing administrative services, and creating similar marketing programs help reduce costs for both companies. Additionally, a wholly-owned subsidiary can provide the parent company with numerous financial benefits. For instance, the subsidiary’s profits and losses are usually consolidated with those of the parent company, potentially reducing tax liability. Moreover, the parent company can have greater flexibility in raising capital and financing operations, as the subsidiary can often tap into its own funding sources.

A majority-owned subsidiary is one in which a parent company has a 51% to 99% controlling interest. In case a transfer has not been registered in the books of a company, then the transferor shall be entitled to receive dividend if he is a registered holder as on the record date. Given below is the diagram illustrating a situation of a holding company appointing a nominee to meet the statutory minimum limit of two members in a wholly-owned private subsidiary company. A parent company only needs to own more than 50% of another company’s stock for that company to be considered a subsidiary.

Subsidiaries can be the experimental ground for different organizational structures, manufacturing techniques, and types of products. Buying an interest in a subsidiary usually requires a smaller investment on the part of the parent company than a merger would. Also unlike a merger, shareholder approval is not required to purchase or sell a subsidiary.