A wholly owned subsidiary is a business entity in which one parent company owns 100% of the shares or equity of another company. In other words, the parent company has full control over the subsidiary and holds all decision-making powers, such as management, strategic direction, and financial decisions. The subsidiary works under the parent company’s management, and the parent wholly enjoys the gains or losses based on the subsidiary’s activities. The parent company separates its operations in this structure while retaining total ownership.
A wholly owned subsidiary is a critical aspect in corporate structuring. Many multinational companies prefer this structure to directly control foreign subsidiaries without involving external partners. A wholly owned subsidiary differs from a joint venture in that in a joint venture, two or more entities share ownership and control over the subsidiary. In a wholly owned subsidiary, the parent company retains complete control.
Wholly Owned Subsidiary Definition
It is a company that another wholly owns, known as the parent company. The parent company owns 100% of its shares; therefore, the parent owns all the subsidiary’s operations, financial decisions, and management. It is a common form of business expansion for corporations that want to maintain absolute control over their business activities.
In a wholly owned subsidiary structure, the parent company may either establish a new company or acquire an existing one. In this case, the subsidiary might operate in another country or industry, but the parent company owns it. This structure is very helpful to businesses that would like to be in control of all aspects of their operations and not have interference from investors, partners, or shareholders.
Advantages of Wholly Owned Subsidiary
A wholly owned subsidiary offers many advantages, not only to the parent company but also to the subsidiary itself. Let’s examine some of the key benefits in detail.
Absolute Control and Decision-Making Authority
The main benefit that a fully owned subsidiary accords the parent company is the complete control it offers. As the parent has 100% shares of this business, it can decide on all the critical issues of the subsidiary, including their strategic direction, management, and financial decisions. This gives no room for compromise, like often happens in a joint venture or partnership.
Greater Flexibility
The parent company can make its decisions independently due to the operation through a wholly owned subsidiary. For example, the parent company can easily decide on changes or introduce new business strategies or market entry without any consultation with the external partners. This flexibility of action gives the parent company a competitive advantage, especially in dynamic and fast-changing industries.
Protection of Intellectual Property
A parent company can protect its IP from other stakeholders by creating a wholly owned subsidiary. This is because the parent will own all trade secrets, patents, trademarks, and other proprietary assets in the wholly owned subsidiary. A wholly owned subsidiary is essential when the subsidiary operates in a foreign country with a different set of intellectual property laws.
Financial Control and Retention of Profits
The parent company of a wholly owned subsidiary can take all the profits made by the subsidiary. In partnerships, however, the profits go to partners in shared ways.
Brand and Reputation Management
A wholly owned subsidiary would allow the parent company to maintain uniformity in branding and reputation. Since the parent company owns the subsidiary outright, it would be able to ensure that the quality standards, business ethics, and corporate culture remain at par. This will ensure that the brand image of the parent company is consistent everywhere in the markets.
Disadvantages of Wholly Owned Subsidiary
Although a wholly owned subsidiary has many advantages, disadvantages and challenges, the parent must fund the subsidiary’s activities, which include staffing, and marketing, among other operational costs, thus overstretching the parent’s finances.
High Costs and Investment
High Costs of Establishing and Maintaining a Wholly Owned Subsidiary The parent company must incur huge amounts of money to create or acquire a subsidiary. These include legal, administrative, and operational costs.
Increased Risk and Responsibility
Because the parent corporation bears all the responsibility for the subsidiary’s activities, it faces the potential risks concerning debt, the liabilities of the law, and matters raised by regulatory agencies. As the subsidiary may experience several challenges like financial losses or crimes the law against it, the parent corporation will handle and solve such issues.
Regulatory and Compliance Challenges
In a wholly owned subsidiary, especially in a foreign market, simply navigating the legal and regulatory requirements is a concern. The legal parent body must adapt to the country’s law and regulation, which may pose a challenge should the subsidiary conduct business in another country, as the two countries have divergent business skills. This will include lawyer support and compliance efforts that might cost more.
Limited Market Knowledge and Expertise
A wholly owned subsidiary may lack knowledge of the local market dynamics if the parent company has no direct experience in the subsidiary’s geographic region or industry. Even though the parent company has control over all decisions, it may be hard to understand the subtleties of the local market, which can lead to operational inefficiencies or strategic missteps.
Procedure for Incorporation of Wholly Owned Subsidiary
The process involves the establishment of a wholly-owned subsidiary. Even though the actual steps may change depending on the locale and type of business, the basic steps of the entire procedure are much the same framework. Here’s an overview of the steps used in the procedure:
Step 1: Initial Decision
The first step in a wholly owned subsidiary incorporation is the decision-making process. The parent company decides whether to start afresh or acquire an existing venture. Beginning an entirely new venture might be more appealing if the parent company desires a separate operation. Acquisition of an existing business, in contrast, may already offer immediate access to an established customer base and installed infrastructure.
Step 2 Legal Structure
Following the decision, the parent company needs to determine the legal structure of the subsidiary. Choosing a suitable legal form, such as a private limited company or corporation as is allowed under the local law and business necessities. This would also require the consultancy of legal professionals for strict adherence to laws and regulations.
Step 3 Registration
The next step involves registering the subsidiary with the relevant local authorities. This step typically includes providing the necessary documentation, such as proof of identity, company structure, and shareholder details.
Step 4: Share Acquisition
If the parent company decides to acquire an existing business, it has to buy 100% of the subsidiary’s shares and become the sole shareholder. The process may require legal negotiations and due diligence to ensure the acquisition is successful.
Step 5: Compliance
The subsidiary must comply with all local laws, regulations, and tax requirements. The parent company must ensure proper accounting, legal, and operational structures are in place to meet all compliance standards.
Step 6: Operations
Once the legalities are completed, the parent company can begin overseeing the operations of the wholly owned subsidiary. The parent appoints key management staff, establishes operational guidelines, and sets the subsidiary’s strategic direction.
Subsidiary vs Wholly Owned Subsidiary
Any business enterprise controlled by another business enterprise is called a subsidiary. The primary differences between a subsidiary and a wholly-owned subsidiary lie in the control aspects.
| Aspect | Subsidiary | Wholly Owned Subsidiary |
| Ownership | Parent owns more than 50% of the shares | Parent owns 100% of the shares |
| Control | Parent has control but with minority shareholder rights | The parent has full control with no external interference |
| Profit Sharing | Profits are shared with minority shareholders | Profits are retained entirely by the parent company |
Wholly Owned Subsidiary vs Joint Venture
Companies can organise their international business activities two main ways: joint ventures and wholly owned subsidiaries. In a joint venture, two or more firms agree to form a new business and share ownership and control. In a wholly owned subsidiary, the parent company owns all the shares.
| Aspect | Wholly Owned Subsidiary | Joint Venture |
| Ownership | The parent company owns 100% of the shares | Multiple parties share ownership |
| Control | The parent has full control | Control is shared among partners |
| Profit Sharing | The parent company retains profits | Profits are divided according to the agreement |
Wholly Owned Subsidiary FAQs
What is a wholly owned subsidiary?
A wholly owned subsidiary is a company fully owned by another company.
What are some wholly owned subsidiary examples?
An example of a wholly owned subsidiary is Google acquiring YouTube.
What is the procedure for incorporation of wholly owned subsidiary?
The steps are making a preliminary decision regarding setting up or acquiring a business, determining the legal structure, registering with the concerned authorities, sharing acquisition, checking compliance, and running the operation.
How does a subsidiary differ from a wholly owned subsidiary?
The main difference between a subsidiary and a wholly owned subsidiary is that in the former, the parent owns the majority of shares, but not 100%, while in the latter, the parent owns 100% of the shares.
Which is better: Wholly owned subsidiary vs joint venture?
One thing the wholly-owned subsidiary differs in compared to the joint venture is control, while the subsidiary puts all controls by the parent and, in contrast, in a joint venture, which entails sharing among numerous partners.
