Business Courses/Intro to Business: Help and ReviewCourse
- AuthorRebekah Marshall
Rebekah Marshall has taught University level History for over 7 years. They have a degree masters degree in Humanities from The University of Texas and a bachelors degree from The University of Texas.
View bio - InstructorShawn Grimsley
Shawn has a masters of public administration, JD, and a BA in political science.
View bio
Learn about wholly owned subsidiaries, subsidiaries, and affiliates. Understand the advantages and disadvantages of each business model, and review real-world examples.Updated: 11/21/2023
Table of Contents
- What is a Wholly Owned Subsidiary?
- Advantages of Wholly Owned Subsidiary
- Disadvantages of Wholly Owned Subsidiary
- What is a Subsidiary?
- Lesson Summary
Frequently Asked Questions
What is the difference between a subsidiary and a wholly owned subsidiary?
In a subsidiary, the parent firm owns 51-99 percent of its stock, making them the majority shareholders. In a wholly-owned subsidiary, the parent company holds 100 percent of its stock and is the sole shareholder.
What are the advantages of wholly owned subsidiaries?
Some of the advantages of wholly owned subsidiaries include timely strategic decision making, retained operational control, easier financial reporting, increased financial resources, and diversification
What is an example of a wholly owned subsidiary?
An example of a wholly owned subsidiary is the Airgas company. This company is fully owned by Air Liquide company, meaning it holds all the Airgas company stocks.
Table of Contents
- What is a Wholly Owned Subsidiary?
- Advantages of Wholly Owned Subsidiary
- Disadvantages of Wholly Owned Subsidiary
- What is a Subsidiary?
- Lesson Summary
A wholly owned subsidiary is a business entity whose entire stock is owned or held by another company, referred to as the parent company. A business can become a wholly owned subsidiary either through a spin-off from the parent company or through acquisition.
Working of a Wholly Owned Subsidiary
With the parent company holding all the shares, there are no minority shareholders, and the parent company usually gives the subsidiary the mandate to operate. However, it operates as an independent legal entity since it retains legal control over the operations, products, and processes. The wholly owned subsidiary may be from another industry or a different country than that of the parent company. In this case, the subsidiary will most likely have its own clients, products, and senior management structure.
Wholly Owned Subsidiary Example
The following list offers wholly owned subsidiary examples and recognizes the corresponding parent companies:
- Airgas is a wholly owned subsidiary, fully owned by Air Liquide.
- Volkswagen Group of America is a wholly owned subsidiary of Air France.
- Transavia is a wholly owned subsidiary of Air France.
 |
- Starbucks Japan is a wholly owned subsidiary of Starbucks Corp.
- Piedmont Airlines is a wholly owned subsidiary of American Airline Group.
 |
To unlock this lesson you must be a Study.com Member.
Create your account
An error occurred trying to load this video.
Try refreshing the page, or contact customer support.
You must cCreate an account to continuewatching
Register to view this lesson
Are you a student or a teacher?
Create Your Account To Continue Watching
As a member, you'll also get unlimited access to over 88,000lessons in math, English, science, history, and more. Plus, get practice tests, quizzes, and personalized coaching to help yousucceed.
Get unlimited access to over 88,000 lessons.
Try it now
It only takes a few minutes to setup and you can cancel any time.
Already registered? Log in here foraccess
Resources created by teachers for teachers
Over 30,000 video lessons& teaching resources‐allin one place.
Video lessons
Quizzes & Worksheets
Classroom Integration
Lesson Plans
I would definitely recommend Study.com to my colleagues. It’s like a teacher waved a magic wand and did the work for me. I feel like it’s a lifeline.
Jennifer B.
Teacher
Try it now
Back
Coming up next:Private Limited Company | Ltd. Meaning & Advantages
You're on a roll. Keep up the good work!
Take QuizWatchNext Lesson
Replay
Just checking in. Are you still watching?
Yes! Keep playing.
Your next lesson will play in10 seconds
- Video
- Quiz
- Course
- Video Only
The wholly owned subsidiary model offers advantages from financial, operational, and strategic perspectives.
Financial Advantages
- Simpler reporting mechanisms. Wholly owned subsidiary statements can be consolidated by the parent company into one financial statement.
- Increased financial resources. The parent company can acquire more financial resources from the subsidiary earnings. It can use these extra funds to grow the enterprise or invest in other profitable initiatives, thereby increasing its rate of return.
- Reduction of overall costs. The wholly owned subsidiary and parent company can integrate their information technology and financial systems, resulting in reduced costs and expenses.
Operational Advantages
- Increased control. A wholly owned subsidiary is advantageous to the parent company since it retains operational control, enabling it to make strategic decisions as needed.
- Increased bargaining power. Due to the increase in its size and structure, it puts the two enterprises in a position to negotiate better terms with the suppliers.
- Strategic partnership between the parent and subsidiary operations through vertical integration, thereby making them more competitive.
- Shared resources. The two firms can take advantage of each other's resources, including support staff with technical, management, and marketing expertise. This reduces administrative overlap while promoting improved launch initiatives and better integration of new product development.
Strategic Advantages
- Timely strategic decision-making. This business model allows for quick execution of strategic priorities. For instance, a parent firm can authorize its wholly owned subsidiary to prioritize a new product launch, allowing a promptness that helps the firm become more competitive, propels faster market penetration, and ultimately increases the firm's market share.
- Promotes synergies in information technology, marketing, research, and development that are cost-effective and bolsters long-term strategic positioning and support.
- Affords the parent company the space to diversify and enter new markets while avoiding competition since it can combine with a foreign subsidiary.
To unlock this lesson you must be a Study.com Member.
Create your account
Despite the long list of advantages, a wholly owned subsidiary has several disadvantages to consider.
- Potential financial losses. Setting up a wholly owned subsidiary is expensive and can drain the parent company's financial resources. Additional funding is required to sustain the subsidiary and pay for any taxes that may be levied. There is also the potential for unforeseen financial losses, as there is no guarantee of success.
- Cultural and political differences. There may be cultural and political challenges in the host country. These variables may negatively affect the success of this business model and that of the parent company since it disturbs its flow and decreases its business focus.
- Lack of operational flexibility. Wholly owned subsidiaries usually lack operational flexibility due to the complexity of management, thereby reducing the firm's competitiveness.
- Possible conflict of interest may exist between the parent company and its wholly owned subsidiary. This can cripple the operations of both firms since it affects their management.
To unlock this lesson you must be a Study.com Member.
Create your account
A subsidiary is a business entity partially owned by another company. In a subsidiary, the parent company owns 51-99 percent of the subsidiary's stock, making them the majority shareholders. By virtue of being the majority shareholder, the parent company controls the assets and operations of the subsidiary; however, the subsidiary retains some rights and degrees of liability since it is still considered a separate legal entity.
Subsidiary Examples
Examples of subsidiaries include:
- American Broadcasting Company: A subsidiary of Walt Disney Corporation
- NBC Universal: A subsidiary of Comcast Corporation
- Bean Suntory Incorporation: A subsidiary of Suntory Holdings Company
Subsidiary vs Affiliate
An affiliate is a business entity whose parent company owns 20-50 percent of its stocks, making them a minority shareholder.
The difference between affiliated and subsidiary companies lies in the percentage of ownership of the parent company. The percentage of ownership under a subsidiary is more than 50 percent; whereas, in an affiliate, the percentage of ownership is less than 50 percent. The power the parent company has and ownership control also differ between a subsidiary and affiliate. In a subsidiary, the parent company has over 51 percent ownership. Because of this, the parent company is considered the majority shareholder and can make business decisions and appoint the board of directors. However, the parent company of an affiliate has less than 50 percent ownership. In this instance, the parent company is considered a minority shareholder and cannot make business decisions or appoint the board of directors.
To unlock this lesson you must be a Study.com Member.
Create your account
A wholly owned subsidiary refers to a business entity whose entire stock is owned by another enterprise, referred to as the parent company. The parent company usually gives the subsidiary the mandate to operate; although, it still retains legal control by virtue of being an independent legal entity. Some of the advantages of wholly owned subsidiaries include timely strategic decision making, retained operational control, easier financial reporting, increased financial resources, and diversification. However, wholly owned subsidiaries also have several disadvantages, such as potential financial losses, cultural and political challenges, lack of operational flexibility, and the possibility of a conflict of interest. A subsidiary is a business entity that is partially owned by another firm, with the parent company owning 51-99 percent of its stocks as a majority shareholder. An affiliate is a firm whose parent company owns 20-50 percent of its stocks as a minority shareholder.
To unlock this lesson you must be a Study.com Member.
Create your account
Video Transcript
What Is a Wholly Owned Subsidiary?
A wholly owned subsidiary is a company that is completely owned by another company. The company that owns the subsidiary is called the parent company or holding company. The parent company will hold all of the subsidiary's common stock. Since the parent company owns all of the subsidiary's stock, it has the right to appoint the subsidiary's board of directors, which controls the subsidiary.
Wholly owned subsidiaries may be part of the same industry as the parent company or part of an entirely different industry. Sometimes, a company will spin off part of itself as a wholly owned subsidiary, such as a computer company spinning off its printer manufacturing division.
Advantages of a Wholly Owned Subsidiary
Wholly owned subsidiaries offer some advantages to the parent company. Companies that must rely upon suppliers and service providers can take control of their supply chain by use of wholly owned subsidiaries. This is a means of vertical integration where companies in a supply chain are under the control of a common owner. For example, a car manufacturing company may have several wholly owned subsidiaries, including a tire company and several different auto parts companies.
Wholly owned subsidiaries also offer an opportunity for companies to diversify and manage risk. Diversification is a means for a company to reduce risk by developing different types of businesses so that if one business or industry isn't doing well, its other businesses may be able to pick up the slack and keep the company profitable. For example, a computer company may decide to get into the printer business, the television business, and the tablet business and either buy or form a wholly owned subsidiary for each new business. Damage from the failure of one subsidiary will not necessarily be fatal to the parent company.
Similarly, a company can reduce its risk in entering into a new market or industry by using subsidiaries which help minimize the parent company's exposure. For example, if your company wants to enter into an emerging market that hasn't been established, it can form a subsidiary to enter the market leaving much of the risk of loss on the subsidiary's shoulders.
A company may also create or purchase wholly owned subsidiaries when conducting business abroad. Sometimes, a parent company will create a subsidiary in a foreign country because it will receive favorable tax treatment from the foreign government. Alternatively, a parent company may be required to form a local subsidiary in order to conduct business in the country. The subsidiary may even have to be formed with a local business partner.
Disadvantages of a Wholly Owned Subsidiary
The use of wholly owned subsidiaries does pose some disadvantages. More taxes may result with use of separate business entities. Use of diversification can have a downside because it may cause the parent company to lose focus on what it does best. This may especially be true if the diversification is not reasonably related to the parent company's industry or field of expertise, such as a computer company buying a dog food company.
Finally, you should note that the parent company does have a legal duty to promote the corporate interests of its subsidiaries. There may be a conflict of interest between the parent company and its subsidiaries. For example, a car manufacturing company may want below market prices for car parts supplied by its subsidiary, but that is against the subsidiary's corporate interest.
Lesson Summary
Let's review. A wholly owned subsidiary is a company completely owned by another company. The company that owns the subsidiary is called the parent company or holding company. Advantages of using wholly owned subsidiaries include vertical integration of supply chains, diversification, risk management, and favorable tax treatment abroad. Disadvantages include the possibility of multiple taxation, lack of business focus, and conflicting interest between subsidiaries and the parent company.
Vocabulary, Advantages & Disadvantages
- Wholly owned subsidiary: company owned completely by another company
- Parent/Holding company: owner of subsidiary companies
| Advantages and Disadvantages |
|---|
| Advantages: |
| Vertical integration of supply |
| Diversification |
| Risk management |
| Favorable taxes abroad |
| Disadvantages: |
| Possibility of additional taxes |
| Lack of focus |
| Conflict of interest |
Learning Outcomes
Completing the lesson successfully means that you're now able to:
- Recognize the meaning of a wholly owned subsidiary
- Compare and contrast the advantages and disadvantages of wholly owned subsidiaries
To unlock this lesson you must be a Study.com Member.
Create your account
Register to view this lesson
Are you a student or a teacher?
Unlock Your Education
See for yourself why 30 million people use Study.com
Become a Study.com member and start learning now.
Become a Member
Already a member? Log In
Resources created by teachers for teachers
Over 30,000 video lessons& teaching resources‐allin one place.
Video lessons
Quizzes & Worksheets
Classroom Integration
Lesson Plans
I would definitely recommend Study.com to my colleagues. It’s like a teacher waved a magic wand and did the work for me. I feel like it’s a lifeline.
Jennifer B.
Teacher
Try it now
Back
Recommended Lessons and Courses for You
- Related Lessons
- Related Courses
