What are the Difference Between a Subsidiary and Wholly-Owned Subsidiary?

There are two categories of businesses that are under the control of a bigger company: subsidiaries and wholly-owned subsidiaries. Because of this, a different organization known as the parent or holding company owns both kinds of businesses. 

Each enables bigger businesses to make money from markets they otherwise couldn’t access, particularly those abroad. However, the ownership stake varies for every firm. More than 50% of a subsidiary’s equity is owned by the parent business.

What is Subsidiary

Any business that is owned by another business is called a subsidiary. The owning corporation, sometimes referred to as the parent or holding company, typically holds more than 50% of the voting shares of the subsidiary.One The parent and subsidiary businesses continue to be distinct legal entities for liability, tax, and regulatory purposes notwithstanding the ownership involvement.

Usually a bigger firm, the parent company maintains control over many subsidiaries. Although parent firms usually have some degree of controlling interest in their subsidiaries, they may be more or less involved with them. The degree of managing control granted to the management personnel of the subsidiary firm by the parent company often determines how much control the parent company exerts.

Generally, parent businesses enter a particular market through subsidiaries. One way they may accomplish this is by establishing a new firm, either domestically or abroad, or by purchasing an existing company that has a good reputation in the target market.

Establishing a conventional subsidiary instead of another kind of corporation might be more advantageous for a parent firm looking to enter a foreign market. The establishment of a normal subsidiary enables the parent to access partners who possess the requisite knowledge and experience to effectively operate in the local context, even in the absence of any legal obstacles. However, the parent business may find things more difficult as subsidiaries sometimes include extra financial and legal labor.

wholly owned subsidiary

The parent business is the sole owner of all common shares of a Wholly Owned Subsidiary. Its stock is not listed publicly and as a result, company has no minority shareholders. Even yet, it continues to function as a separate legal entity, a company with its own administrative structure and organizational structure. The parent firm probably controls all aspect of this structure’s daily operations, in contrast to a typical subsidiary, which has its own management group.

Wholly-owned subsidiaries assist parents in entering new markets, particularly international ones, in a similar manner to conventional subsidiaries. Green-field investments are one way to do this, as they include creating whole new businesses from the bottom up. This entails obtaining permissions, constructing facilities, and providing staff training, among other things. Purchasing an established business in the intended market is an alternative strategy.

Establishing a subsidiary of this kind has several benefits:

License laws in many nations make it difficult or impossible for new businesses to be formed. When a parent firm buys a subsidiary that already possesses the required operating permissions, it can start operating more quickly and with less administrative hassle.

Coordination of an international business plan is possible. Companies that a parent company deems essential to its overall business performance are typically chosen to become wholly-owned subsidiaries.

However, parent corporations need to be aware that companies with operations in different nations could have distinct work cultures. As a result, rules and practices might not coincide with those of the parent. The implementation of acquisitions can be expensive, and conducting business in another nation has certain risks.

Examples of Subsidiary vs. Wholly Owned Subsidiaries 

To understand how subsidiaries and wholly-owned subsidiaries operate, we may examine a number of real-world instances. A worldwide holding company is called Berkshire Hathaway (BRK.A and BRK.B). With its main office located in Omaha, Nebraska, the corporation has over 60 subsidiaries, some of which are fully owned and some of which function as standard subsidiaries.

Subsidiary

Founded in the early 1920s in North America, General Re is a multinational reinsurance corporation. In 1929, the business changed its name to “direct reinsurer,” providing its services only to insurance firms directly. Both in North America and Europe, the firm is well-established. Berkshire Hathaway purchased General Re Corporation, its parent business, in 1998. It thereafter became a division of Berkshire at that moment.

Wholly Owned Subsidiaries

Under Warren Buffet’s direction, Berkshire Hathaway, which was formerly a textile firm, started to broaden its scope. Purchasing stock in the Government Employees Insurance Company, better known by its popular moniker, GEICO, in the 1970s was one of its initial moves toward diversification. Up until 1996, when Buffett bought every outstanding share of GEICO, the company was still open for business. GEICO at this moment became a Berkshire Hathaway Wholly Owned Subsidiary.

What Sets a Wholly Owned Subsidiary Apart from a Joint Venture?

The ownership arrangements of a joint venture (JV) and a Wholly Owned Subsidiary differ from one another. An organization or partnership that is founded and run by two distinct businesses is known as a joint venture. As opposed to this, a corporation that is owned by a single entity is a Wholly Owned Subsidiary. This firm is the only one that has control over this kind of subsidiary; it is referred to as the parent company.

How Is It Possible to Establish a Wholly Owned Subsidiary in an International Market?

In a foreign market, a parent business has two options for establishing a Wholly Owned Subsidiary. The simplest and first method is to purchase a majority share in a well-established business so that it may offer its products and services in the target nation.

Establishing a green-field investment is another method to achieve this. This entails starting from scratch to establish a completely new subsidiary in a foreign nation. This include completing the necessary paperwork, constructing production facilities, and providing workers with market-specific training. 

There are two types of subsidiaries: fully owned and partially owned. A normal subsidiary has a majority ownership held by the parent firm exceeding fifty percent. In contrast, a Wholly Owned Subsidiary is totally owned by the parent company. This indicates that all of this subsidiary’s common stock is owned by the parent.

Conclusion 

Businesses that are wholly-owned or at least substantially controlled by another corporation are referred to as subsidiaries. Although the parent or holding company owns both kinds of businesses, its ownership position varies depending on the kind of business. Over 50% of a subsidiary is owned by the main corporation.