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 companyParent CompanyA holding company is a company that owns the majority voting shares of another company (subsidiary company). This company also generally controls the management of that company, as well as directs the subsidiary's directions and policies. only.
Table of contents
- 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 companySubsidiary CompanyA subsidiary company is controlled by another company, better known as a parent or holding company. The control is exerted through ownership of more than 50% of the voting stock of the subsidiary. Subsidiaries are either set up or acquired by the controlling 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.
- 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.
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 statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels. of both the companies need to be merged into the parent company ABC at the group level.
ABC holds 99% in DEF. In this case, there are 1% minority shareholdersMinority ShareholdersMinority interest is the investors' stakeholding that is less than 50% of the existing shares or the voting rights in the company. The minority shareholders do not have control over the company through their voting rights, thereby having a meagre role in the corporate decision-making. 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 capitalCompany's Share CapitalShare capital refers to the funds raised by an organization by issuing the company's initial public offerings, common shares or preference stocks to the public. It appears as the owner's or shareholders' equity on the corporate balance sheet's liability side.. 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.
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 financialsPrepare Consolidated FinancialsConsolidated Financial Statements are the financial statements of the overall group, which include all three key financial statements – income statement, cash flow statement, and balance sheet – and represent the sum total of its parents and all of its subsidiaries. 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.
- 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.
- AcquiringAcquiring A New CompanyAcquisition refers to the strategic move of one company buying another company by acquiring major stakes of the firm. Usually, companies acquire an existing business to share its customer base, operations and market presence. It is one of the popular ways of business expansion. 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.
Wholly Owned Subsidiary is a 100% controlled companyControlled CompanyThe controlled company refers to the business entity whose 50% or more voting stocks are held by other organizations. Such a corporation is not required to adhere to public company rules, and the major stakeholders have the right to select the company's directors.. All the 100% controlled companies need to report their balance sheetsBalance SheetsA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company., income statementsIncome StatementsThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements., and cash flow statementsCash Flow StatementsA Statement of Cash Flow is an accounting document that tracks the incoming and outgoing cash and cash equivalents from a business. 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
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.
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.
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 –