What Is A Wholly-Owned Subsidiary?

Because the parent company owns all the shares of a wholly-owned subsidiary, there are no minority shareholders. The subsidiary operates with the permission of the parent company, which may or may not have direct input into the subsidiary’s operations and management. A wholly-owned subsidiary is a business entity whose common outstanding shares are all owned by a parent company. In this article, we will define what a wholly owned subsidiary is, explore its key features, and provide examples of companies that use this business model effectively. Establishing a separate legal entity may also result in additional expenses related to tax filings, employee management, and overall liability handling.

These subsidiaries allow the parent to serve local markets efficiently while retaining total operational control, tax compliance, and oversight of the subsidiary’s assets cultural alignment. A joint venture (JV) involves two or more companies sharing ownership, control, and profits in a new entity, while a wholly-owned subsidiary is entirely controlled by one parent. When two companies come together, their unique cultures can clash in subtle yet significant ways.

Tax advantages

• Legally distinct yet strategically aligned, these subsidiaries allow companies to manage risk, enter new markets, and operate with greater autonomy.
• A wholly owned subsidiary allows a parent company to own 100 percent of the shares of a new company incorporated abroad.
• The subsidiary most likely has its own executive structure, products, and customers.
• You’ll see the concept with a real-world example, and how it compares with a regular subsidiary.
• The details mentioned in the respective product/ service document shall prevail in case of any inconsistency with respect to the information referring to BFL products and services on this page.
• When a company owns less than 50% of the smaller business, that is known as an equity investment.

The parent can also consolidate financial results, streamline tax planning, and shift resources efficiently between entities to maximize overall profitability and regulatory compliance. This structure is often used by companies to expand into new markets, control specific operations, or manage risk by separating different business activities under legally distinct entities. Although a wholly owned subsidiary operates as a separate legal entity, it is completely governed by the parent company in terms of strategic direction and decision-making. Check your business loan eligibility if you’re planning such a structural expansion for your business. A wholly owned subsidiary (WOS) is a separate legal entity whose entire outstanding stock is held by a single parent company. This corporate arrangement is a structural tool that allows a larger enterprise to organize and manage its business operations across different markets and product lines.

Learn about what is the meaning of a wholly owned subsidiary in India and some important aspects including considering factors before setting up and pros and cons of a wholly owned subsidiary. As a wholly-owned subsidiary company, the financial results of the same would be combined with the parent company in the annual report of the parent company on the balance sheet date. The purpose of making a wholly-owned subsidiary is to diversify the company’s business operations and create a separate channel to run it. When a company’s almost all outstanding shares are owned by another company (parent), it can be said that it is a wholly-owned subsidiary of that company and the parent company controls it. For example, Walt Disney Entertainment holds 100 percent of Marvel Entertainment which produces movies. When a parent company acquires a subsidiary by purchasing all of the outstanding shares, the acquisition is considered a qualified stock purchase for tax purposes.

Full Ownership and Decision Control

Additionally, subsidiaries can engage in activities that the parent company cannot, such as generating revenue for non-profit organizations. The subsidiary is subject to federal income taxes, and the parent company retains its tax-exempt status. In other words, the parent company owns 100% of the subsidiary company’s shares and has complete authority over the subsidiary’s operations. The subsidiary company is considered to be an extension of the parent company, and its assets and liabilities are reported on the parent company’s financial statements. Setting up a wholly owned subsidiary requires significant investment—from legal fees and registration costs to ongoing compliance management. The process can take months and demands deep knowledge of local regulations, tax laws, and employment requirements.

• When a company is owned either partially or completely by an outside entity, it’s known as a subsidiary.
• Moreover, a subsidiary has to handle all its operations on its own, separate from its parent company.
• Because the parent company owns all the shares of a wholly-owned subsidiary, there are no minority shareholders.
• Therefore, DEF will prepare consolidated financials with XYZ, and ABC will prepare its financials.

This transparency fosters trust among stakeholders and enhances the overall financial health of the parent company by ensuring subsidiaries are contributing to the bottom line in a measurable way. To understand it better, think of it as a situation where you’re the owner of a small business within your larger corporation. You make decisions for that business, but ultimately, the larger company has the final say. This structure allows for flexibility while maintaining strong control over operations. Overall, the subsidiary model can simplify integration and enhance the parent company’s ability to manage diverse business units.

There may be a few more differences between subsidiaries and wholly owned subsidiaries. More research on subsidiary vs wholly owned subsidiary would be done before setting up any of these subsidiaries! A subsidiary is a company that is partially owned by another company, referred to as the parent or holding company. A parent company holding at least 51% of shares also demonstrates a controlling interest in the subsidiary.

The parent may appoint the board of directors, influence major decisions, and monitor financial performance. In a wholly-owned company structure in India, the company and its members have separate legal identities. Moreover, a subsidiary has to handle all its operations on its own, separate from its parent company. A subsidiary is a company whose stock is more than 50% owned by a parent company or a holding company.

A director is an individual appointed to the Board of a Company who is entrusted with taking care of all day-to-day activities of the company. India is a fast-growing economy and is anticipated to grow at an even better pace in the years to come. Due to this, the inclination of foreign nationals/corporations toward wholly owned subsidiary meaning Indian business sectors has increased.

According to the Companies Act 2013, a company will be referred to as a Wholly Owned Subsidiary when all the shares are owned by another company. In most cases, a wholly-owned subsidiary is located in a country other than that of the parent company’s origin country. Since it is a 100% holding, all the funds infused in the subsidiary are of the parent company, and they are free to decide about the prospects as well. A company with multiple subsidiaries can use the losses of one subsidiary to offset the profits of another, thereby reducing its overall tax bill. Moreover, non-profit entities can establish for-profit subsidiaries without endangering their tax-exempt status. The parent company owns the automotive brands Audi, Bentley, Porsche, Lamborghini, and Volkswagen.

Regulatory and Tax Compliance

Still, there will not be any need to reflect the results of the subsidiary companies in its annual report since there is no full control by ABC and still, 1% shares are pending to be acquired. 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 by each entity. A wholly owned subsidiary offers businesses a powerful way to expand, innovate, and capture new markets while retaining full ownership and control.

Company Ownership Structure

In some countries, licensing regulations may make the formation of new companies difficult or impossible. If a parent company acquires a subsidiary that already has the necessary operational permits, it can begin conducting business sooner and with less administrative difficulty. When entering a foreign market, a parent company may benefit from a regular subsidiary rather than any other type of entity. Even without any legal barriers to entry, establishing a regular subsidiary helps the parent tap into partners with the expertise and familiarity needed to function in local conditions. The establishment of a wholly-owned subsidiary, however, can result in the parent company paying too much for assets, especially if other companies bid on the same business.

A parent company can set up a wholly-owned subsidiary to align with its global corporate strategy. A parent company usually selects companies to become wholly-owned subsidiaries that it considers vital to its overall success as a business. Parent companies must keep in mind that businesses in different countries may have different workplace cultures.

Disadvantages of Subsidiary Company

Combining some operations is efficient, and replacing some management may be necessary. However, these changes must be implemented while minimizing disruption to the subsidiary as much as possible. Other examples include Marvel and Lucasfilm, which are wholly owned subsidiaries of The Walt Disney Company.

Wholly owned subsidiaries are a common way for businesses to expand their presence domestically and internationally while maintaining centralized ownership and control. A parent company may exert total control over a wholly owned subsidiary, but each company has its own liabilities, tax requirements, and leadership. Establishing and maintaining a wholly owned subsidiary involves a greater administrative burden and higher initial setup costs compared to simpler arrangements like a branch office or an affiliate. The parent company must invest the capital required to establish the entire entity, including registering with local authorities, hiring staff, and building infrastructure.

They serve as a vital means for expansion into new markets, increasing production capacity, and diversifying revenue streams. Additionally, they can offer opportunities to reduce risks by allowing greater control over operations, finances, and strategic decision-making. Overall, establishing a wholly-owned subsidiary can help businesses capitalize on unique market opportunities while minimizing potential risks. A subsidiary is more likely to have its own executive structure, products, and of course customers. In this case, since DEF holds full share capital of XYZ, XYZ is a wholly-owned subsidiary of DEF and DEF is a parent company for XYX. Therefore, DEF will prepare consolidated financials with XYZ, and ABC will prepare its financials.