It is likely that you are aware of the trend among larger corporations to acquire smaller ones as a means of expanding their businesses.
When a larger company acquires the entire stock of another entity, the acquired firm becomes a wholly-owned subsidiary of its parent organization.
This article delves into the mechanics of a wholly-owned subsidiary and its role in fostering business growth.
What is a wholly owned subsidiary ?
A wholly owned subsidiary is a company that is entirely owned by another company typically referred to as the parent company.
In simple terms a subsidiary company is like a child to the parent company, and the parent company is the owner of the subsidiary.
In this blog post we will discuss wholly owned subsidiaries in detail, including their benefits, how they are created, and how they are controlled.
We will also look at the role of company share capital in wholly owned subsidiaries.
Wholly owned subsidiaries-definition and benefits
Benefits of creating Wholly owned subsidiaries
The benefits of creating a wholly owned subsidiary are numerous.
- It allows the parent company to expand its operations into new markets or industries with minimal risk.
- Since the subsidiary is a separate entity the parent company’s financial obligations are limited to it’s share capital in the subsidiary. In other words if the subsidiary incurs debts or faces legal liabilities it is solely responsible for them, and the parent company is not liable.
- As the parent company possesses complete ownership of a wholly-owned subsidiary, there are no minority shareholders to consider.
- The subsidiary operates with the approval of the parent company which may or may not have direct involvement in its activities and management.
- Another advantage of wholly owned subsidiaries is protecting the intellectual property and brand of the parent company. By establishing a subsidiary company, the parent company can maintain separation between its assets and intellectual property from the subsidiary’s business activities.
This helps to minimize any potential legal risks. Moreover, the parent company can involve the subsidiary to enter into contracts and agreements, minimizing potential legal disputes.
- A completely-owned subsidiary, for instance, could be established in a foreign country from that of the parent organization. The subsidiary would typically operate its own executive framework, product line, and client base.
- The presence of a wholly-owned subsidiary might enable the parent company to maintain its business operations in diverse geographical locations, industries, or product markets.
Such advantages are crucial to adapting to changing market dynamics, as well as geopolitical and trade policies.
Tax benefits of wholly owned subsidiaries
- If a parent company chooses to absorb the assets of an acquired company, it risks losing the tax benefits associated with wholly-owned subsidiaries.
- On the other hand, when a parent company purchases the stock of a subsidiary company, the acquisition qualifies for special tax treatment.
- Additionally, the subsidiary’s losses can be utilized to offset the parent company’s profits, leading to reduced tax obligations.
- In certain situations, a subsidiary may have the capacity to execute strategies that the parent company is unable to pursue independently.
- To illustrate, a non-profit organization might establish a for-profit subsidiary with the aim of generating additional revenue.
- Despite the subsidiary being liable for federal income taxation, the parent company would retain its tax-exempt status.
Pros and cons of wholly owned subsidiaries
- Non-profit entities have the option to establish subsidiaries that operate for a profit, but still retain their tax-exempt status.
- In certain instances, parent companies can utilize losses incurred by one subsidiary as a means of offsetting taxes on profits earned by another.
- Additionally, the parent company inherits clients and good-will from the acquired subsidiary, which would otherwise prove challenging to establish on their own.
- The investment of assets owned by the wholly-owned subsidiary also falls within the purview of the parent company.
- Operating a subsidiary presents challenges in cases where the acquired company’s management practices differ from one’s own.
- The acquisition of a company can prove costly, particularly given the possibility of competition from other interested parties.
- It should be noted that there is an elevated level of risk associated with operating a subsidiary company in an unfamiliar jurisdiction.
- The creation of a wholly-owned subsidiary can potentially lead to the parent company overpaying for assets, particularly when other firms are vying for the same undertaking.
- Moreover, the parent company generally assumes all the risks associated with owning a subsidiary company which can be compounded when local regulations significantly diverge from those of the parent company’s country of origin.
The success or failure of a partnership between a parent company and its wholly-owned subsidiary largely depends on how operational and strategic control is executed.
Adopting common operating procedures can be less complicated when a company hires internal staff to manage the subsidiary, as opposed to retaining the established leadership.
However, when acquiring a subsidiary in a new industry or overseas, a parent company may opt for a more hands-off approach and retain the existing management team. Such decisions are crucial in determining the long-term success of the subsidiary.
Subsidiary vs wholly owned subsidiary
A subsidiary company is a business entity that is predominantly owned by a parent or holding company, with over 51% of its stock being held by the said party.
This ownership structure grants the parent or holding company a significant controlling interest in the subsidiary’s management, operations, and earnings.
Nevertheless, the subsidiary is still legally bound to fulfil its financial responsibilities towards its minority shareholders.
A wholly-owned subsidiary refers to a subsidiary company that is fully owned by the parent organization, without any involvement of minority stakeholders.
Things to keep in mind while establishing a wholly owned Indian subsidiary
- A minimum of two shareholders must be present.
- There must be two directors, with at least one being an Indian resident.
- All directors must possess a valid DIN (Director Identification Number).
- All directors must possess a DSC (Digital Signature Certificate).
- Introduction of a subscribed share capital is mandatory .
Following these dictates is essential for the successful establishment of a Wholly Owned Indian Subsidiary.
Role of company share capital in wholly owned subsidiaries
Company share capital is the amount of money that a company raises through the issuance of shares.
In the context of wholly owned subsidiaries, the parent company owns 100% of the subsidiary’s shares and provides the share capital required to fund the subsidiary.
The company’s share capital is recorded as an asset on the subsidiary’s balance sheet, and the parent company’s investment in the subsidiary is recorded as an equity investment on its own balance sheet.
The company’s share capital serves several purposes in wholly owned subsidiaries.
- it provides a funding source for the subsidiary’s operations. This includes financing the purchase of assets, paying salaries and expenses, and investing in growth opportunities. Depending on the subsidiary’s legal structure, the company’s share capital may also be used to pay off any debts that the subsidiary incurs.
- The share capital helps to establish the subsidiary’s financial viability and credibility.
The company’s share capital also acts as a protection against any losses or liabilities.
A wholly owned subsidiary is a company that is entirely owned by another company, typically referred to as the parent company. Wholly owned subsidiaries offer numerous benefits, including expanding the parent company’s operations into new markets or industries, protecting its intellectual property, and mitigating legal risks. The key to creating a wholly owned subsidiary is to identify the business needs and legal structure, register the subsidiary company with the relevant authorities, establish a management structure, and fund the subsidiary through share capital. Company share capital plays a vital role in wholly owned subsidiaries, providing funding and establishing the subsidiary’s financial viability and credibility.