Wholly Owned Subsidiary
When one company owns more than 50% of another company’s stock, but less than 100%, the second company is considered a subsidiary of the first company. The parent company does not have to be bigger than the subsidiary. All that matters is that it owns the stock.A wholly owned subsidiary is a company whose common stock is 100% owned by another company. When a company owns less than 50% of another company, it holds a minority interest in that company.Let’s say National Lighting owns 25% of one company, 70% of another and 100% of a third. The first is a minority interest, the second is a subsidiary and the third is a wholly owned subsidiary.A subsidiary is a separate, distinct legal entity for tax, regulation and liability purposes. Many companies have subsidiaries for overseas markets, where there are many different types of laws, taxes and liabilities, not to mention different currency and political risks. Corporations also use subsidiaries to manufacture or market different brands or product types owned by the parent company.Owning a minority interest might be enough if a company simply wants preferential access to another company’s output. A greater level of ownership is usually required to have access to the company’s proprietary technology, however.With a wholly owned subsidiary, the parent company can control all production, management and profits, but it also shares costs and responsibilities.
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Subsidiary vs. Wholly-Owned Subsidiary: An Overview
Subsidiaries and wholly-owned subsidiaries are two types of companies that fall under the purview of another, larger company. As such, both types of companies are owned by another entity, which is called the parent or holding company. Each allows larger companies to profit from markets in which they normally wouldn’t be able to operate, especially those in foreign countries. But the owning company’s stake is different for each. The parent company owns a majority stake (more than 50%) in a subsidiary. The controlling interest in a wholly-owned subsidiary, on the other hand, amounts to 100%.
Key Takeaways
- Parent companies own subsidiaries and wholly-owned subsidiaries.
- Both corporate structures allow parents or holding companies to enter new markets.
- The parent company has at least a 50% stake in a subsidiary and a 100% stake in a wholly-owned subsidiary.
- Subsidiaries generally answer to their own management teams and directors while parent companies are normally in control of wholly-owned subsidiaries.
- Berkshire Hathaway is a holding company with dozens of subsidiaries, such as General Re, and wholly-owned subsidiaries like GEICO.
Subsidiary
A subsidiary is a company that is owned by another company. The owning company, which is called the parent or holding company, usually owns more than 50% of its voting stock (it can be half plus one share more) of the subsidiary. Despite the stake in ownership, the subsidiary and parent companies remain separate legal entities for liability, tax, and regulatory reasons.
The parent company is typically a larger business that retains control over more than one subsidiary. Parent companies may be more or less active with respect to their subsidiaries, but they always hold some degree of controlling interest. The amount of control the parent company exercises usually depends on the level of managing control the parent company awards to the subsidiary company management staff.
Parent companies generally use subsidiaries to get into a specific market. They can do this by setting up a new company (whether foreign or domestic) or by acquiring a company that’s already established in the target market.
When entering a foreign market, a parent company may be better off by putting up a regular subsidiary rather than any other type of entity. Even without any legal barriers to entry, creating a regular subsidiary helps the parent tap into partners who already have the expertise and familiarity needed to function with local conditions. But subsidiaries often come with increased legal and accounting work, which can make things more complicated for the parent company.
Important
Any subsidiary established in a foreign market, whether regular or wholly owned, must follow the laws and regulations of the country where it is incorporated.
Wholly-Owned Subsidiary
With a wholly-owned subsidiary, the parent company owns all of the common stock. As such, there are no minority shareholders, and its stock is not traded publicly. Despite this, it still remains an independent legal body—a corporation with its own organized framework and administration. Unlike a regular subsidiary, which has its own management team, the day-to-day operations of this structure are likely directed entirely by the parent company.
Like the regular subsidiary, wholly-owned subsidiaries help parents tap into new markets, especially those in foreign countries. This can be done through green-field investments, which involve setting up brand new entities from the ground up. This means getting approvals, building facilities, training employees, among other things. The other way is to make an acquisition of an existing company in the target market.
There are a number of advantages of setting up this type of subsidiary:
- In some countries, licensing regulations make the formation of new companies difficult or impossible. If a parent company acquires a subsidiary that already has the necessary operational permits, it can begin conducting business sooner and with less administrative difficulty.
- There is the potential for coordination of a global corporate strategy. A parent company usually selects companies to become wholly-owned subsidiaries that it considers vital to its overall success as a business.
But parent companies must keep in mind that businesses that operate in different countries may have different workplace cultures. This means that policies and procedures may not align with those of the parent. Acquisitions may be costly to execute and there may be inherent risks (geopolitical, currency, trade) that come with doing business in another country.
Note
A majority-owned subsidiary is one in which a parent company has a 51% to 99% controlling interest.
Special Considerations
As noted above, a subsidiary is a separate legal entity for tax, regulation, and liability purposes. Parent companies can benefit from owning subsidiaries because it can enable them to acquire and control companies that manufacture components needed for the production of their goods. This is especially true if the parent wants to get into another market, such as a different country.
If the subsidiary has valuable proprietary technology, the parent company may attempt to turn the company into a wholly-owned subsidiary in order to have exclusive control over the subsidiary’s technology. This could give the parent company a competitive advantage over its rivals.
Subsidiary vs. Wholly Owned Subsidiary Examples
There are many real-world examples that we can look at to show how subsidiaries and wholly-owned subsidiaries work. Berkshire Hathaway (BRK.A and BRK.B) is a multinational holding corporation. Headquartered in Omaha, Nebraska, the company has more than 60 subsidiaries, some of which are regular subsidiaries and others that are wholly owned.
Subsidiary
General Re is a global reinsurance company whose North American history dates back to the early 1920s. The company became a direct reinsurer in 1929, offering its services directly and only to insurance companies. The company has a large presence in North America and in Europe. In 1998, Berkshire Hathaway acquired its parent company, General Re Corporation. At that point, it became a subsidiary of Berkshire.
Wholly-Owned Subsidiary
Berkshire Hathaway was originally a textile company but began to expand its horizons under the leadership of Warren Buffet. One of its first steps to diversify was by going into the insurance sector by taking an equity stake in the Government Employees Insurance Company, which most people know as GEICO, in the 1970s. The company remained public until 1996 when Buffett purchased all of GEICO’s outstanding stock. At this point, GEICO became a wholly-owned subsidiary of Berkshire Hathaway.
What Is the Difference Between a Joint Venture and a Wholly-Owned Subsidiary?
The difference between a joint venture (JV) and a wholly-owned subsidiary lies in their ownership structures. A JV is a firm or partnership that is established and operated by two different companies. A wholly-owned subsidiary, on the other hand, is a company that is owned by a single entity. This company, known as the parent company, is the only one that maintains control over this type of subsidiary.
How Can a Wholly-Owned Subsidiary Be Established in a Foreign Market?
A parent company can set up a wholly-owned subsidiary in a foreign market in a couple of different ways. The first and most obvious way is to acquire a controlling stake in an established company to sell its goods and services in the desired country. Another way to do so is to set up a green-field investment. This involves creating a brand new subsidiary in another country from the ground up. This includes going through the regulatory process, building manufacturing facilities, and training employees in that market.
Can a Subsidiary Not Be Wholly-Owned?
Subsidiaries can be both wholly-owned and not wholly-owned, With a regular subsidiary, the parent company’s ownership stake is more than 50%. A wholly-owned subsidiary, on the other hand, is fully owned by the parent. This means that the parent holds 100% of this subsidiary’s common stock.
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