Wholly Owned Subsidiary

What Is a Wholly Owned Subsidiary?

A wholly owned subsidiary is a company whose common stock is 100% owned by another company. A company can turn into a wholly owned subsidiary through an acquisition by a parent company. A majority-owned subsidiary is a company whose common stock is 51% to close to 100% owned by a parent company.

At the point when lower costs and risks are attractive — or when it is unimaginable to expect to get complete or majority control — the parent company could present a affiliate, associate, or associate company in which it would possess a minority stake.

Grasping a Wholly Owned Subsidiary

Having a wholly owned subsidiary might assist the parent with companying keep up with operations in different geographic areas and markets or separate industries. These factors help hedge against changes in the market or international and trade rehearses, as well as declines in industry sectors.

Since the parent company claims every one of the shares of a wholly owned subsidiary, there are no minority shareholders. The subsidiary works with the permission of the parent company, which might have direct contribution to the subsidiary's operations and management. This might make it a unconsolidated subsidiary.

Regardless of being owned by another entity, a wholly owned subsidiary might keep up with its own management structure, clients, and corporate culture. At the point when a company is acquired, its employees might worry about cutbacks or restructuring.

In spite of the fact that auxiliaries are separate substances, they might share a few executives or board individuals with their parent company.

Accounting for a Wholly Owned Subsidiary

From an accounting stance, a wholly owned subsidiary is as yet a separate company, so it keeps its own financial records and bank accounts tracking its assets and liabilities. Any transactions between the parent company and the subsidiary must be recorded.

Both Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS) expect companies to report the financial data of their auxiliaries on the off chance that the parent company is public. This data can be found in the parent company's consolidated financial statement.

Advantages and Disadvantages of a Wholly Owned Subsidiary

Albeit a parent company has operational and strategic control over its wholly owned auxiliaries, the overall control is commonly less for an acquired subsidiary with a strong operating history overseas. At the point when a company employs its own staff to manage the subsidiary, shaping common operating procedures is substantially less confounded than while assuming control over a company with laid out leadership.

Moreover, the parent company might apply its own data access and security directives for the subsidiary as a method of reducing the risk of losing intellectual property to different companies. Essentially, utilizing comparable financial systems, sharing administrative services, and making comparative marketing programs assist with decreasing costs for the two companies, and a parent company directs how its wholly-owned subsidiary's assets are invested.

In any case, getting a wholly owned subsidiary might bring about the parent company paying a high price for its assets, particularly on the off chance that different companies are bidding on a similar business. Likewise, laying out associations with sellers and nearby clients frequently takes time, which might frustrate company operations; social differences might turn into an issue while hiring staff for an overseas subsidiary.

The parent company likewise expects all the risk of claiming a subsidiary, and that risk might increase when neighborhood laws vary fundamentally from the laws in the parent company's country.

Tax Advantages of Wholly Owned Subsidiaries

There are tax advantages for wholly owned auxiliaries that might be lost assuming the parent company just ingests the assets of an acquired company. At the point when a parent company secures a subsidiary by buying up that company's stock, the acquisition is viewed as a qualified stock purchase for tax purposes. Also, any losses by a subsidiary can be utilized to offset the profits of the parent company, bringing about a lower tax liability.

At times, a subsidiary can do things that the parent company can't. For instance, a non-benefit entity can make a for-benefit subsidiary, to raise revenue. While the subsidiary would be subject to federal income taxes, the parent company would stay exempt.

Pros and Cons of Wholly Owned Subsidiaries

Pros

Tax-exempt organizations can have for-profit subsidiaries
Parent companies can use losses from one subsidiary to offset profits from another.
The parent company inherits the acquired company's clients and good-will, which would be hard to recreate from scratch.

Cons

Running a subsidiary can be difficult if the acquired company has a different management culture.
Acquiring another company can be expensive, especially if other companies are also seeking to acquire them.
Risks may be higher if the subsidiary is located in a different jurisdiction than the parent company.

## Instances of Wholly Owned Subsidiaries

A well known illustration of a wholly owned subsidiary system is Volkswagen AG, which wholly possesses Volkswagen Group of America, Inc. what's more, its recognized brands: Audi, Bentley, Bugatti, Lamborghini (wholly owned by Audi AG), and Volkswagen.

Also, Marvel Entertainment and Lucasfilm are wholly owned auxiliaries of The Walt Disney Company. Coffee monster Starbucks Japan is a wholly owned subsidiary of Starbucks Corp.

Highlights

In contrast to different auxiliaries, a wholly-owned subsidiary has no obligations to minority shareholders.
Wholly owned auxiliaries permit the parent company to enhance, manage, and conceivably reduce its risk.
The financial consequences of a wholly owned subsidiary are reported on the parent company's consolidated financial statement.
A wholly owned subsidiary is a company whose common stock is 100% owned by a parent company.
As a general rule, wholly owned auxiliaries hold legal control over operations, products, and processes.

FAQ

What Is the Difference Between a Subsidiary and a Wholly Owned Subsidiary?

A subsidiary is any company whose stock is over half owned by a parent company or holding company, giving that parent company a controlling interest in the subsidiary's profits and choices. Notwithstanding, the management actually has financial obligations to the minority shareholders. A wholly-owned subsidiary is 100% owned by the parent company, with no minority shareholders.

What Are the Tax Benefits of a Subsidiary?

A company with numerous auxiliaries can utilize the losses of one subsidiary to offset the profits of another, in this manner decreasing the overall tax bill. Additionally, non-benefit substances can lay out for-benefit auxiliaries without jeopardizing their tax-exempt status.

What Is the Difference Between a Holding Company and a Parent Company?

A holding company is a company that main exists to hold a controlling stock in different elements, while a parent company has its own operations. For instance, Berkshire Hathaway is a notable holding company whose principal business is procuring shares of different companies. Pepsi is a parent company that works several auxiliaries, notwithstanding its core business as a soft beverage manufacturer.

How Are Wholly Owned Subsidiaries Accounted for?

Wholly-owned auxiliaries keep up with separate accounts from their parent companies, however their finances are typically reported together. In the event that a public company has wholly-owned auxiliaries, the financial data for those auxiliaries are reported alongside those of the parent on the company's consolidated balance sheets.