Wholly owned subsidiary
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A wholly owned subsidiary is a company that is completely owned by another company. This means that the parent company, or controlling company, has exclusive control over the subsidiary company's operations, including decision making and financial activity. The parent company owns 100% of the subsidiary’s stock and is liable for all of its debts. The parent company is also the sole beneficiary of the subsidiary’s profits. The subsidiary is legally and financially separate from the parent, but the two companies are typically linked through a common board of directors.
Example of wholly owned subsidiary
- Apple Inc. is a wholly owned subsidiary of Apple Inc. Apple Inc. is the controlling company, owning 100% of the stock. Apple Inc. is responsible for all of the subsidiary's operations, decision making, and financial activity. Apple Inc. is also the sole beneficiary of the subsidiary's profits. Apple Inc.'s board of directors consists of both Apple Inc. and Apple Inc. representatives.
- Amazon.com is a wholly owned subsidiary of Amazon.com, Inc. Amazon.com, Inc. is the controlling company, owning 100% of the stock. Amazon.com, Inc. is responsible for all of the subsidiary's operations, decision making, and financial activity. Amazon.com, Inc. is also the sole beneficiary of the subsidiary's profits. Amazon.com, Inc.'s board of directors consists of both Amazon.com, Inc. and Amazon.com representatives.
- Walmart is a wholly owned subsidiary of Walmart Inc. Walmart Inc. is the controlling company, owning 100% of the stock. Walmart Inc. is responsible for all of the subsidiary's operations, decision making, and financial activity. Walmart Inc. is also the sole beneficiary of the subsidiary's profits. Walmart Inc.'s board of directors consists of both Walmart Inc. and Walmart representatives.
When to use wholly owned subsidiary
A wholly owned subsidiary can be a beneficial structure for businesses when they want to:
- Enter a new market - A wholly owned subsidiary allows a business to set up a new entity in another country, giving it the control to localize its operations and respond to local market needs.
- Increase efficiency - By creating a wholly owned subsidiary, a business can separate the financial, operational and administrative activities of different divisions or businesses.
- Reduce risk - A wholly owned subsidiary can be used to reduce the risk associated with a new venture by limiting the financial commitments of the parent company.
- Leverage assets - A wholly owned subsidiary can be used to leverage existing resources and assets to expand operations into new markets.
- Expand operations - A wholly owned subsidiary allows a business to expand its operations without making a large financial commitment.
Types of wholly owned subsidiary
A wholly owned subsidiary is a company that is completely owned by another company. This type of corporate structure provides a range of benefits to the parent company, including increased financial flexibility, tax advantages, and control over the subsidiary’s operations. There are several different types of wholly owned subsidiaries, including:
- Manufacturing subsidiaries: These are subsidiaries that are involved in the manufacturing of goods. The parent company can use the subsidiary to create new products and expand its production capabilities.
- Service subsidiaries: These are subsidiaries that provide services to the parent company or other external customers. The parent company can use the subsidiary to provide specialized services or expand the company’s service offerings.
- Holding subsidiaries: These are subsidiaries that are used to own other companies or investments. The parent company can use the subsidiary to diversify its investments and reduce risk.
- Joint venture subsidiaries: These are subsidiaries that are created as a partnership between two or more companies. The parent company can use the subsidiary to reduce costs, share resources, and access new markets.
- Financing subsidiaries: These are subsidiaries that are used to finance the parent company’s operations. The parent company can use the subsidiary to access capital and manage its financial risks.
Advantages of wholly owned subsidiary
A wholly owned subsidiary offers numerous advantages for the parent company. These include:
- The parent company can benefit from the subsidiary’s profits without having to pay out dividends to multiple shareholders.
- The parent company can also control the subsidiary’s operations, allowing them to maintain tighter control over their investments.
- The parent company can transfer resources, such as employees and technology, from the parent company to the subsidiary without any tax implications.
- The parent company also has the ability to access new markets and customers through the subsidiary.
- In some cases, the parent company can take advantage of the subsidiary’s tax structure, which may be more beneficial than the parent company’s.
- The subsidiary can also benefit from the parent company’s resources, such as capital and personnel, which can help the subsidiary grow.
Limitations of wholly owned subsidiary
A wholly owned subsidiary has several limitations which should be considered before making this decision. These include:
- The parent company has unlimited liability for the subsidiary’s debts and liabilities, making it a risky proposition.
- The parent company has complete control over the subsidiary, which can limit the subsidiary’s ability to make decisions independently.
- The subsidiary may not be eligible for certain state and federal tax incentives as it is considered part of the parent company.
- The subsidiary is not eligible for certain corporate benefits such as employee stock options or retirement plans.
- It can be difficult to separate the finances of the parent company and the subsidiary, leading to potential conflicts of interest.
A wholly owned subsidiary is a company that is completely owned by another company. This means that the parent company, or controlling company, has exclusive control over the subsidiary company's operations, including decision making and financial activity. Other approaches related to this type of ownership include:
- A Joint Venture: This is an agreement between two or more companies to cooperate in order to achieve a common goal. The companies involved in a joint venture typically share costs, profits, and risks.
- An Equity Investment: This is an investment made by a company in another company in exchange for an ownership stake in the business. This gives the investor a share of the profits and losses, as well as voting rights.
- A Strategic Alliance: This is a collaboration between two or more companies in which they share resources, knowledge, and expertise to achieve a common goal.
In summary, a wholly owned subsidiary is a company that is completely owned by another company, and there are several other approaches to ownership, such as joint ventures, equity investments, and strategic alliances.
Suggested literature
- Yiu, D., & Makino, S. (2002). The choice between joint venture and wholly owned subsidiary: An institutional perspective. Organization science, 13(6), 667-683.
- Chang, S. J., Chung, J., & Moon, J. J. (2013). When do wholly owned subsidiaries perform better than joint ventures?. Strategic Management Journal, 34(3), 317-337.
