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Wholly Owned Subsidiary

Updated on May 22, 2024
Article byWallstreetmojo Team
Edited byAaron Crowe
Reviewed byDheeraj Vaidya, CFA, FRM

Wholly Owned Subsidiary Definition

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.

Wholly Owned Subsidiary is a separate independent legal entity that is 100% owned and controlled by another company (parent company) and directly works under the guidance and decision-making of the parent company. It has its senior management to control the company’s business operations; however, all the strategic decisions at the group level have been taken by the parent company only.

Key Takeaways

  • A wholly-owned subsidiary is a separate legal entity that is 100% owned and controlled by another company (parent company).
  • The purpose of creating a wholly-owned subsidiary is to diversify the parent company’s business operations and create a separate channel to run it.
  • Advantages of having a wholly-owned subsidiary include easier management, the ability to follow parent company policies and procedures, increased valuation and brand recognition, and better relations with customers and investors.
  • Disadvantages include the time and effort required for due diligence and closing the transaction, regulatory and cultural differences, etc.

The purpose of making a wholly-owned subsidiary is to diversify the company’s business operations and create a separate channel to run it.

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.

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.

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Examples

Example #1

  • Starbucks company Japan is a wholly-owned subsidiary of the Starbucks group.
  • The Walt Disney Company holds 100% of the share capital of Marvel entertainment and EDL Holdings.
  • Volkswagen AG owns the entire Volkswagen America.

Example #2

ABC holds 100% in DEF, and DEF holds 100% in XYZ. In this case, DEF and XYZ are both wholly-owned subsidiary companies of ABC, and the financial statements of both the companies need to be merged into the parent company ABC at the group level.

Example #3

ABC holds 99% in DEF. In this case, there are 1% minority shareholders in the company which has not been acquired. 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.

Example #4

ABC holds 99% in DEF, and DEF has 100% in XYZ. 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. But DEF is not the wholly-owned subsidiary of ABC since total capital is not owned. Therefore, DEF will prepare consolidated financials with XYZ, and ABC will prepare its financials. 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.

Advantages

  • Due to 100% control, it is easier to follow the parent company policies and procedures, thus helping the group to achieve synergies.
  • Easy to manage as the strategic decision-making lies with the parent company.
  • The subsidiary company gets a tag of the parent group since it is merged in the group fully due to the 100% acquisition.
  • It increases the valuation of the subsidiary company since now it is under the umbrella of the parent group, which is a big brand in the market.
  • Results are grouped under the parent company at each balance sheet date.
  • The subsidiary company gets a good brand name by acquiring the top brand, thus increasing the parent company’s valuation and market share by developing an established player in the market.
  • Building relations with customers and investors becomes easy if the parent has strong connections in the market.

Disadvantages

  • Acquiring a new or existing company requires a lot of time working on the diligence process and finally closing the transaction.
  • Identification of M&A opportunities in the industry is a tough task.
  • Establishing relationships among vendors, regulators, bankers, investors, lenders take a lot of time since they are unaware of the functioning of the subsidiary.
  • In the case of a cross-border acquisition, many regulatory laws affect the functioning of the subsidiary. E.g., In the parent company, a particular project might be permissible; however, in the subsidiary company, the local laws in the country may not permit it.
  • Company operations and cultural differences can be a major concern.

Conclusion

Wholly Owned Subsidiary is a 100% controlled company. All the 100% controlled companies need to report their balance sheets, income statements, and cash flow statements to the group to merge with the parent financials on each reporting date as per the accounting framework. 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.

Frequently Asked Questions

1. What is a wholly-owned subsidiary vs. a joint venture?

A wholly owned subsidiary is a company completely owned and controlled by another. At the same time, a joint venture is a business arrangement where two or more parties come together to form a new entity and share ownership, control, and risks.

2. What are the types of wholly owned subsidiaries?

There are two main types of wholly owned subsidiaries: horizontal and vertical. A horizontal wholly-owned subsidiary engages in the same type of business as the parent company. In contrast, a vertical wholly owned subsidiary is involved in a different stage of the supply chain, either as a supplier (backward integration) or as a distributor (forward integration) for the parent company.

3. What is an indirect wholly owned subsidiary?

An indirect wholly-owned subsidiary is a subsidiary company wholly owned by another subsidiary company, which is, in turn, wholly owned by the parent company. In other words, it is a subsidiary company that is owned through multiple layers of subsidiary companies, with the ultimate ownership residing with the parent company.

This has been a guide to a wholly-owned subsidiary and its definition. Here we discuss examples of wholly-owned subsidiaries along with advantages and disadvantages. You can learn more about Corporate Finance from the following articles –