What is a Wholly-Owned Subsidiary?
A wholly-owned subsidiary is an entity whose common stock is entirely owned by another company. Businesses often become wholly-owned subsidiaries through acquisitions.
Key Takeaways:
- Complete Ownership: A wholly-owned subsidiary’s stock is fully owned by a parent company.
- Diversification and Reduced Risk: It enables the parent company to diversify its portfolio, streamline operations and minimize risks.
- No Minority Shareholders: There are no minority shareholders in wholly-owned subsidiaries.
- Financial Integration: Their financial outcomes are reported on the parent company’s consolidated financial statement.
Benefits of Holding a Wholly-Owned Subsidiary
For parent companies, having wholly-owned subsidiaries allows them to operate in diverse markets and industries, providing a hedge against market and geopolitical shifts. Though these subsidiaries are separate legal entities, they operate with the permission of the parent company, which might exert varying degrees of control over their operations.
Often, when a parent company acquires a firm, there’s worry about employment impacts. It is true that restructuring to reduce costs can lead to workforce reductions. However, both entities may benefit from these consolidations through cost savings.
Accounting for a Wholly-Owned Subsidiary
While keeping independent financial records, a wholly-owned subsidiary remains distinct for accounting purposes. Transactions between the parent and the subsidiary must be meticulously recorded. Popular accounting standards such as GAAP and IFRS mandate the inclusion of a subsidiary’s financial records within the parent company’s consolidated statements.
Pros and Cons of a Wholly-Owned Subsidiary
Advantages:
- Parent companies gain considerable control and can easily impose standard operating procedures.
- Shared data policies, security systems, and marketing strategies can lower costs.
- Tax benefits: losses of subsidiaries can offset parent company profits for lower overall tax liability.
Disadvantages:
- High acquisition costs if multiple companies are bidding.
- Challenging transition periods involving vendor and client relationship management, especially for overseas subsidiaries.
- Assuming greater risk due to different local laws and cultural practices.
Real-World Examples
Volkswagen Group fully owns premium automotive brands such as Audi, Bentley, Porsche, and Lamborghini.
The Walt Disney Company has fully integrated subsidiaries like Marvel and Lucasfilm.
Holding Company vs. Parent Company
A holding company primarily holds stock in other companies, while a parent company also conducts its own business operations. For instance:
- Berkshire Hathaway functions as a holding company.
- PepsiCo is a parent company with core operations in beverage production, owning various subsidiaries like Sodastream and Gatorade.
Tax Benefits
A prominent benefit of multiple subsidiaries is the facility to balance profits and losses, reducing tax liability. Non-profits can form for-profit subsidiaries, which allows for revenue generation while maintaining tax-exempt status of the parent entity.
Final Thoughts
Acquiring a wholly-owned subsidiary can significantly enhance a company’s operations, market presence, and efficiency. However, smoothly managing the integration post-acquisition is critical for long-term success.
Related Terms: majority-owned subsidiary, affiliate, associate company.
References
- IAS Plus. “IFRS 10-Consolidated Financial Statements”.
- Volkswagen Group. “Brands”.
- The Walt Disney Company. “The Walt Disney Family of Companies”.
- Pepsico. “About Pepsico”.
