The difference between a subsidiary and a wholly owned subsidiary is the amount of control held by the parent company. A parent company has a controlling interest in another company, which means it has majority ownership of that company and controls its operations. A parent company will own 51% to 99% of a regular subsidiary's voting stock. If a parent company owns 100% of the stock, the subsidiary is said to be a wholly owned subsidiary.
- Parent companies hold majority ownership of subsidiary companies and the amount of ownership determines whether the company owned by the parent is a regular subsidiary or a wholly owned subsidiary.
- If the parent company owns 51% to 99% of another company, then the company is a regular subsidiary.
- If the parent company owns 100% of another company, then the company is a wholly owned subsidiary.
- For some large corporations, the advantage of having a regular subsidiary is that it enables the corporation to enter into foreign markets that would otherwise be closed to them.
A regular subsidiary company has over 50% of its voting stock (it can be half, plus one share more) controlled by another company, though, for liability, tax, and regulatory reasons, the subsidiary and parent companies remain separate legal entities.
The parent company is typically a larger business that often has control over more than one subsidiary. Parent companies may be more or less active concerning their subsidiaries, but they always hold a controlling interest to some degree. The amount of control the parent company chooses to exercise usually depends on the level of managing control the parent company awards to the subsidiary company management staff.
Parent companies may be more or less active concerning their subsidiaries, but they always hold a controlling interest to some degree.
Wholly Owned Subsidiary Company
A subsidiary company is considered wholly owned when another company, the parent company, owns all of the common stock. There are no minority shareholders. The subsidiary's stock is not traded publicly. But it remains an independent legal body, a corporation with its own organized framework and administration. Its day-to-day operations are likely directed entirely by the parent company, however.
Wholly Owned Subsidiary
Advantages of a Wholly Owned Subsidiary
The setup of a wholly owned subsidiary is advantageous in a number of ways. 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.
Another advantage of wholly owned subsidiaries 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.
Advantages of a Subsidiary
In other instances, when entering a foreign market, a parent company may be better off by putting up a regular subsidiary than a wholly owned subsidiary. Local laws may set up ownership restrictions that make a wholly owned operation impossible. Even without legal barriers to entry, there may be other advantages. The regular subsidiary can tap partners that have the expertise and familiarity it needs to function with local conditions.
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.
If the subsidiary company 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.
One example of a parent-subsidiary relationship is CNN, which set up a subsidiary in the Philippines. CNN could not put up a wholly owned company in the Philippines because its constitution forbids total foreign ownership of any form of media. The solution was to partner with the new owners of a TV station on the verge of closing. The new owners were well aware of the fierce competition in broadcast media in the country, which is dominated by two giants. The solution was to go for a fresh niche by rebranding itself as a local news network that served as a subsidiary of CNN.