What is a Wholly-Owned Subsidiary? Features, Requirements and Advantages

Over the last five years, he has created and managed content for global brands and fintech startups. He is passionate about remote work and using tech for a better work-life balance. Still, a subsidiary is often a poor fit, especially for rapidly growing businesses.

However, normal and wholly-owned subsidiaries are bound by an area’s local laws and regulations. The parent company is not entirely immune to problems, but it faces fewer risks and costs than if the wholly-owned subsidiary was the company’s part. This article explains everything about a Wholly-owned subsidiary, from its meaning, features, advantages, and disadvantages, to examples.

Interesting, the parent company may or may not have anything to do with the activities and managerial tasks of the subsidiary. For instance, it is possible that a wholly owned subsidiary and a parent company operate independently except for the routine reporting of performance. A wholly owned subsidiary is a business entity whose equity (ownership interest) is held or owned by the parent company.

A wholly-owned subsidiary is a company that has a parent company that owns its 100% common stock. Finally, the parent company assumes all the risk of owning a subsidiary. That risk may increase when local laws differ significantly from the laws in the parent company’s country.

What Is a Subsidiary Company and How Does It Work?

Entrepreneurs form thousands of Delaware LLC subsidiaries every month, each with discrete purposes and assets of their own. Both large companies and entrepreneurs prefer Delaware as the premier location for forming LLCs. This wholly owned subsidiary example is because Delaware’s business laws provide protections for business owners that are unmatched by any other state. Opening a subsidiary can help large businesses reduce costs by increasing their overall resource pool.

A business can become a wholly owned subsidiary either through a spin-off from the parent company or through acquisition. When a company is a wholly owned subsidiary of a parent company, they use consolidated accounting. In this method, the subsidiary’s financial statements merge with the parent company’s.

A wholly-owned subsidiary is a company that is legally separate from its parent company but still retains all the same shares and assets. A parent company can set up a subsidiary in any country and be treated as an independent company for taxation purposes. The Wholly-Owned Subsidiary structure enables greater control over the business and its operations while reducing taxes and other liabilities. A Wholly-Owned Subsidiary is one of the most common subsidiary structures worldwide, but one should consider its specific tax advantages before incorporating it. However, engaging contractors exposes your company to serious misclassification risks.

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The reality is that many businesses cannot afford the time and resources required for entity establishment—especially if they plan to enter multiple markets worldwide. Establishing a foreign subsidiary is costly and time-consuming, which deters many companies from building global teams. Preparation alone involves several months of meticulous research and a sizable upfront investment. When a company has multiple subsidiaries, it can use the loss of one company to balance with the profits of others.

For example, Marvel Entertainment is a wholly-owned subsidiary of Walt Disney. Another prime example of a wholly-owned subsidiary is KFC, which is a wholly owned subsidiary of PepsiCo Inc. Foreign subsidiaries make sense for your business if you have validated your target market and are ready to commit to long-term investments. As per the rules of the Bar Council of India, we are not permitted to solicit work and advertise. In cases where the user has any legal issues, he/she in all cases must seek independent legal advice.

Subsidiary Companies [Examples, Pros & Cons]

Examples of this would be a summer camp forming a wholly owned subsidiary to hold title to a boat or a business forming one to own its private aircraft. An independent subsidiary manages its own day-to-day operations, but they need to get approval from their parent before settling on any bigger decisions. However, if the parent wants to take control over all the operations of the subsidiary, it can automatically accept all liability for the subsidiary.

• A foreign subsidiary is a company that operates in one country but is partially or wholly owned by a parent company based in another country.
• Similarly, a company can reduce its risk in entering into a new market or industry by using subsidiaries which help minimize the parent company’s exposure.
• LLCs are a common choice among corporations founding subsidiaries – anyone can form an LLC by using a professional LLC service, or they can learn how to start LLCs themselves.
• The subsidiary offers the parent company opportunities for growth while protecting it from litigation in the host country.
• It is a requirement for many states that companies have a business permit or rights to run.

With the help of these subsidiaries, a company can diversify its business and lower its risk. Cultural norms vary greatly between countries, which impacts daily operations. The parent company must adapt to the cultural norms of their foreign subsidiary’s host country and accommodate different workday schedules or approaches to completing tasks.

Objective for Wholly-owned Subsidiary

You can also work with a global Employer of Record (EOR) to hire internationally. Since the subsidiary is founded and based in its own country of operation, there are fewer international rules and regulations than for operating a single company across borders. As a plus, the parent company owns the subsidiary in full, so there’s no doubt about who controls it. These three factors make wholly owned foreign subsidiaries one of the most common solutions for companies that want to operate across international borders. Businesses that are considering branching out into foreign countries are taking on a significant task. There are a lot of decisions to make during the process, starting from the very basics.

It is essential that the board of directors of the parent company identify the purpose of the wholly owned subsidiary. Most jurisdictions have laws prohibiting the parent companies to set up wholly owned subsidiaries as shell companies. Therefore, having a defined objective for the incorporation of a wholly owned subsidiary must be shown by way of the documents of incorporation. Incorporating a wholly owned company is advantageous because while it allows the parent business to control the decision-making of the wholly owned company without having to inherit its losses.

Tax Benefits

A subsidiary may become wholly owned as the result of an acquisition, or because the parent spun off certain assets and liabilities into a separate entity. Larger organizations are more likely to have wholly owned subsidiaries. A company may also create or purchase wholly owned subsidiaries when conducting business abroad.

Instead of taking on the costs and stress of opening your own subsidiary, you can let Skuad do the administrative work and focus on choosing great people and expanding your business. Subsidiaries can work well for many companies, but they can sometimes cause more problems than they solve. That’s why it’s essential to understand the pros and cons before deciding whether to open a foreign subsidiary of your own. The term “wholly owned foreign subsidiary” can be broken down into three basic terms. The term ‘affiliate’ is at times used to refer to companies that are in some way related to each other; This can bring them some tax benefits, or easier access to new markets. Finally, you should note that the parent company does have a legal duty to promote the corporate interests of its subsidiaries.

The acquiring firm, also termed the parent company, owns the entire share capital of a wholly owned subsidiary, or acquired firm. Therefore, the existence of a minority stakeholder group is not possible. A subsidiary is a company that belongs to another company, referred to as the parent company or holding company. The parent owns more than 50% of the subsidiary and holds a controlling interest in the stock. Subsidiaries are established as separate legal entities for tax and liability purposes. Wholly owned subsidiaries may be part of the same industry as the parent company or part of an entirely different industry.

That gives the parent company a controlling interest in the subsidiary’s operations, management, and profits. However, the subsidiary still has financial obligations to its minority shareholders. Foreign subsidiary characteristics vary between jurisdictions, but they must all be at least 50% owned by their parent company.

Therefore, prior to incorporating a wholly owned subsidiary, a parent company should consider if there is enough in the company coffers to meet the minimum capital requirement. This is the case when the parent company is the sole owner of the subsidiary. Profits and losses of subsidiaries can be accounted for on the parent company’s books.