What is a Wholly-Owned Subsidiary?

A wholly owned subsidiary is a separate company entirely controlled by a parent company. Unlike other subsidiaries, it allows for greater control and faster decisions. In this article we will see why this form of company is so widely used worldwide.

What is Wholly-Owned Subsidiary?

What is a wholly owned subsidiary? It is a company where another business—the parent—holds 100% of the equity. This structure gives the parent complete control while the subsidiary operates as a legally separate entity with its assets, liabilities, and governance framework.

How a Wholly-Owned Subsidiary Works?

In order to establish a subsidiary, there are 3 possible approaches: share acquisition, incorporation from scratch, or internal expansion. Despite being a separate entity, the parent company fully controls the subsidiary, which therefore appoints the BoD, controls decisions, and absorbs assets and liabilities into its consolidated balance sheet.

Key Characteristics

100% Ownership

In a wholly-owned subsidiary, the parent company owns all shares or equity. If you wish expanding your business, consider this option. 

Separate Legal Entity

Despite full ownership, wholly owned subsidiaries remain distinct legal entities. This separation ensures liability protection, clearly delineating the responsibilities between the subsidiary and its parent company.

Full Control by Parent Company

The parent company holds operational and managerial control. It plans the budget and decides on operations, leaving the subsidiary to implement decisions. Finally, it is responsible for keeping the subsidiary compliant all times. 

Benefits of a Wholly-Owned Subsidiary

Greater Control

The holding company fully controls the subsidiaries by completely managing the brand’s policies, operations, and standards.

Limited Liability

Through legal separation, the subsidiary can protect the parent company from legal and financial liabilities. In this way, it safely protects the company’s assets. 

Tax Efficiency

Owning an acquired company can give significant tax benefits by structuring appropriate subsidiaries across jurisdictions. Business formation consulting can help you in forming the right company. 

Simplified Global Expansion

Wholly-owned subsidiaries greatly facilitate entry into foreign countries. Without external partners or shared equity, parent companies maintain control, facilitating easier global strategy implementation. 

IP and Asset Protection

Separating two societies makes it possible to isolate and protect intellectual property and data. This is because of the total separation of holding and subsidiary companies.

Challenges and Considerations

Setup and Administrative Costs

Establishing a wholly-owned subsidiary involves large initial and operating costs due to administrative, tax and bureaucratic expenses. It is essential to keep expenses under control when managing corporate complexity. 

Regulatory Compliance

Each jurisdiction has unique legal, tax, and reporting obligations. Continuous compliance across multiple territories demands extensive knowledge of local regulations and thorough operational oversight.

Risk of Reputational and Operational Overlap

Always remember that any failure of the subsidiary company—although isolated and protected by separate legal entities—can permanently affect the parent company as well. Non-compliance with laws, bankruptcy, or misconduct will adversely affect the leading brand. 

Wholly-Owned Subsidiary vs. Other Structures

Vs. Joint Venture

Joint ventures are another effective way to expand into an international market. They allow using the know-how of local companies. However unlike wholly-owned subsidiaries, owne control is not total; therefore, decisions must also be shared. 

Vs. Partially-Owned Subsidiary

Partially owned subsidiaries also include minority shareholders. In this case, in fact, the parent company does not hold 100% of the shares in the subsidiary. As a result, decisions are made less quickly, and operational control is not complete. 

Vs. Branch Office

Business branches are divisions that a company can adopt to operate better on a foreign market. They do not have a separate legal entity and therefore do not distinguish between parent and subsidiary companies. Patents and intellectual property cannot be protected in this case, as they are always under the holding company’s control. 

Global Use of Wholly-Owned Subsidiaries

Understanding what is wholly-owned subsidiary company can help us understand why multinationals so widely employ them. First, as mentioned, they allow total decision-making and operational control of the subsidiary, with no interference from other shareholders. For example, sectors such as finance, technology, retail or manufacturing use this model to protect their know-how or brand uniformity. At the juridical level, wholly-owned subsidiary are widely used in the United States, the United Kingdom, Germany, Canada, and Singapore. 

Legal and Tax Implications

Although the subsidiary has a totally separate legal entity, the parent companies remain accountable for all tax obligations and foreign ownership laws. For this reason, it is essential to assess the local juridical framework very carefully to avoid double taxation, remittance of profits or illegal behavior. At the accounting level, however, the subsidiary continues to meet its reporting obligations, while its assets, liabilities, revenues, and expenses are included in the parent company’s consolidated financial statements.

When to Consider a Wholly-Owned Subsidiary

There are various scenarios in which a wholly-owned subsidiary can be chosen at the start-up stage. These include:

• Starting a new business or expanding into an overseas market: If you want to keep total control of your operations, this is the ideal solution;
• Acquisition of an existing local company: In this case, buying a company and structuring it as its own subsidiary allows control but also the legal autonomy necessary for the subsidiary; 
• Entry into high-risk sectors: The complete juridical separation between parent and subsidiary protects confidential information, patents, licenses, and more. Additionally, it can provide a global payroll system, useful for managing payments and salaries. 

FAQs

What is a wholly owned subsidiary company?

It is a company wholly-owned and controlled (with 100% of shares) by a parent company. The companies will remain legally separate, but the subsidiary is entirely under the parent company’s control. Its assets and liabilities will also appear in the consolidated financial statements. 

Can a wholly-owned subsidiary be in another country?

Of course, it is the most common use. Multinationals often enter other countries and use this model to do so with productivity. The advantages are manifold: an efficient global payroll system, patent and trademark protection, total control of activities, etc. 

Is a wholly-owned subsidiary a separate legal entity?

Yes, it is a legally separate entity from the ownership company. However, it remains under its operational and financial control. This structure allows extensive flexibility, for example, in hiring new talents and managing the HR department.

Why do companies use wholly-owned subsidiaries?

There are many reasons, but all of them related to the expansion in other countries. First of all to have more operational and decision-making control. Secondly, to protect themselves from possible juridical liabilities, increase tax efficiency, and speed up expansion. This makes it easier to hire qualified HR staff, identifying culturally integrated talent. 

How is a wholly-owned subsidiary different from a joint venture?

A joint venture is owned by a holding but has no separate juridical entity. It belongs to the group and is a branch of it. A wholly-owned subsidiary, on the other hand, is wholly owned by the parent company but legally separate from it.

Reference

Daniels, J. D., Radebaugh, L. H., & Sullivan, D. P. (2019). International Business: Environments and Operations (16th ed.). Pearson.
https://www.scirp.org/reference/referencespapers?referenceid=2725824

Verbeke, A. (2021). International Business Strategy (2nd ed.). Cambridge University Press.
https://www.cambridge.org/highereducation/books/international-business-strategy/A04B9C9A7721CDEE3FC06180F94700C0#overview

Hill, C. W. L. (2021). International Business: Competing in the Global Marketplace (13th ed.). McGraw-Hill Education.
https://www.researchgate.net/publication/279283366_Hill_C_W_L_International_business_Competing_in_the_global_marketplace_McGraw-Hill_Education_Maidenhead_Berkshire_UK_2014