They are responsible for managing their own affairs and implementing the strategies set by the parent company. Although the parent company can usually control most of the shares of the subsidiaries, the former allows them to control and assume responsibility for all decisions related to the financial and operational system. In cases where a subsidiary is 100% owned by another firm, the subsidiary is referred to as a wholly-owned subsidiary. These become very important when discussing a reverse triangle merger (a subsidiary created by an acquiring company, purchasing the former a target company, and being absorbed by the target company). Conversely, the parent may be larger than some or all of its subsidiaries (if it has more than one), as the relationship is defined by control of ownership shares, not the number of employees.
- When a parent company owns one or more subsidiaries, financial analysis becomes more complex—but also more revealing.
- It also helps contain potential risks within a separate legal entity.
- A holding company’s primary purpose is to own and control subsidiaries.
A majority-owned subsidiary is one where the parent company owns more than 50% but less than 100% of the subsidiary’s stock. This gives the parent company control over the subsidiary but also involves other shareholders. The parent company can make decisions for the subsidiary, because the parent company controls the subsidiary’s board of directors.
That is not to say that the use of a group structure can always ringfence all commercial risks and liabilities as, from a practical perspective, this may not be possible. A group structure can therefore also help to protect against reputational and commercial risk. Another alternative is to organise the business into divisions within a single company. Group structures can themselves take a variety of forms, from a horizontal structure, vertical structure to various forms of hybrid structures (examples of which are illustrated below).
This grants them significant control over the subsidiary’s decision-making, but allows for some level of independence. Majority-owned subsidiaries can operate with their own management and business strategies, while still adhering to the overall vision of the parent company. Like a devoted parent, a wholly owned subsidiary is completely owned and controlled by its parent company. The parent company has 100% of the voting shares, giving it absolute authority over the subsidiary’s decisions and operations. These subsidiaries often serve as extensions of the parent company, carrying out specific tasks or expanding its reach into new markets.
Subsidiaries vs Other Business Entities
If the subsidiary faces financial challenges, the parent company is generally protected. This separation can be particularly advantageous in risky industries or new ventures. Parent companies are generally not liable for the debts and obligations of their subsidiaries. This is because subsidiaries are separate legal entities, and their liabilities are limited to their own assets. However, there are exceptions to this rule, such as when a parent company guarantees the debts of its parent and all subsidiaries together can be termed as subsidiary. Subsidiaries, on the other hand, are responsible for their own debts and obligations.
Ownership Structure
It’s a compelling structure that can confer numerous benefits but also poses unique challenges. A parent shall prepare consolidated financial statements using uniform accounting policies for similar transactions and other events in similar circumstances. The impact of holding assets outside the company/group also needs to be considered in the context of any future sale and the likely requirements of any potential buyer. Many of the tax reliefs and regulatory benefits require certain economic ownership conditions to be met i.e. the parent to own (directly or indirectly) a specified percentage of the ordinary share capital of the subsidiary. For example, lenders and suppliers may require the parent company to guarantee or underwrite the subsidiary’s liabilities.
- Subsidiaries, on the other hand, have a degree of autonomy in their day-to-day operations.
- The holding company structure allows the parent company to have control over the subsidiary without actually owning it.
- If the ownership stake of the parent company is less than 100%, a minority interest is recorded on the balance sheet to account for the portion of the subsidiary that is not owned by the parent company.
- Today, it owns dozens of subsidiaries spanning multiple sectors and industries.
- A look at the personal estate planning issues which arise following a sale and the tax implications of selling your business.
Despite the name “parent company,” the relationship between a parent company and its subsidiaries is not the same as a parent and child relationship. While the parent company does hold influence over the subsidiary company, the subsidiary is a legally independent entity. A parent-subsidiary structure can streamline operations, expand market reach, and drive long-term growth—but only if the numbers (and the strategy) add up.
What Is a Wholly-Owned Subsidiary? How It Works and Examples
But when a larger company acquires a smaller company—or at least a majority interest in it—the two companies typically retain their own financial statements. In such a structure, the acquiring company becomes the parent company and the acquired company becomes a subsidiary. Although the books are kept separately, the company typically also prepares (for presentation purposes) a set of consolidated financial statements—balance sheet, income statement, and statement of cash flows—that reflect combined performance. If the parent company doesn’t control more than half of the shares in the subsidiary, it is considered a minority-owned subsidiary. This setup allows the parent firm to step back and let the subsidiary run its day-to-day business.
What Should I Do if My Business Partner Is Making Decisions Without Me?
In this way, the parent business is able to exert complete authority over the subsidiary. From long-term planning to operational details, the parent has complete control. The board of directors of a parent company might greatly benefit from board management software.
This gives the parent company total control over the subsidiary’s operations. The parent can make all decisions, from strategic direction to day-to-day operations. When it comes to business, the terms “subsidiary” and “parent company” are often used interchangeably.
Wholly Owned Subsidiary: Explain how a subsidiary is 100% owned and controlled by the parent company.
The parent company can appoint the board of directors of the subsidiary and can make decisions about its business operations. The subsidiary must follow the directives of the parent company, but it also has some degree of autonomy. The parent company owns 100% of the subsidiary’s shares, so it has the final say on every decision, big or small. In a minority-owned subsidiary, the parent company is a significant investor but cannot make unilateral decisions. It may be able to elect some board members and influence some decisions, but it must work with other owners. This type of subsidiary can offer strategic benefits, like market entry or technology access, without the need for total control.
Then we’ll review why companies use this strategy and its role in mergers and acquisitions (M&A). While subsidiary company directors are allowed to manage the company as they see fit, the parent company can remove the directors in the event of unsatisfactory performance. Allowing directors to run the subsidiary company without constant oversight is generally a much better solution than the parent company dictating operations. Businesses often break themselves down into “divisions” to focus on certain product lines, geographic areas, or customer bases.
One of the biggest examples of a wholly-owned subsidiary is YouTube. It had great potential to transform online video content and digital media. By adding YouTube as a wholly-owned subsidiary, Alphabet gave the platform more freedom. It could innovate independently while still leveraging the parent company’s resources. If the parent company wants, it can appoint its own directors to the board of the subsidiary company. For example, this can make it difficult for the directors to make decisions, as they will be pulled between the interests of the parent company and those of the subsidiary.