A wholly-owned subsidiary is a corporation with 100% shares held by another corporation, the parent company. Although a corporation may become a wholly-owned subsidiary through take over by the parent company or split off from the parent company. The parent company holds a normal subsidiary from 51% to 99%.
If lower costs and risks are desirable, or if complete or majority ownership can not be obtained, the parent company may create a subsidiary, associate, or joint venture in which it would own a minority stake.
How It Works?
As the parent company owns all the shares of a wholly-owned subsidiary, minority shareholders are not present. The subsidiary works with the parent company's approval and may or may not have direct input to the activities and management of the subsidiary. That could turn it into an unconsolidated subsidiary.
A wholly-owned subsidiary, for example, maybe in a country other than that of the parent company. The subsidiary most likely has its own executive structure, products, and customers. Having a wholly-owned subsidiary may allow the parent company to sustain operations in different geographic areas and markets, or separate sectors. These factors help to cope up with the changes in the market or geopolitical and trade practices.
Advantages & Disadvantages
Although a parent company has operational and strategic control over its wholly-owned subsidiaries, and acquired subsidiary with a strong operating history overseas typically has less overall control.
Furthermore, the parent company may apply its own data access and protection directives to the subsidiary as a way of reducing the risk of losing other companies intellectual property. A parent company directs how its wholly-owned subsidiary's assets are invested.
The establishment of a wholly-owned subsidiary, however, can result in the parent company paying too much for assets, especially if other companies bid on the same business. The parent company often assumes all the risk of owning a subsidiary, and that risk may increase if local laws vary considerably from the laws in the country of the parent company.