Updated : October 7, 2024Difference Between Subsidiary and Wholly Owned Subsidiary
Overview :In today’s competitive corporate era, a subsidiary is one of the most attractive options for large companies/corporations to extend their business to a new market, region, or country. Subsidiaries are further categorized as a wholly-owned subsidiary and a partially owned subsidiary depending upon the type of ownership. Many advantages and disadvantages are associated with subsidiaries. Explore subsidiary vs wholly owned subsidiary with this blog post.
Subsidiary and Wholly-owned subsidiaries are often used interchangeably but are two different entities. A subsidiary company is a type of company that is owned by another large company or corporation, called a parent company or holding company.
The parent company owning the subsidiary company in India holds the majority of shares, generally more than 50%, whereas in a wholly-owned company, the parent company has 100% shareholding in it. While, in the case of taxes and some other regulations, a subsidiary is considered as a separate legal entity from its holding company. Dive deeper into the fundamentals and key differences between a subsidiary and wholly-owned subsidiary with this piece of writing!
What is a Subsidiary?
A subsidiary is a company that is partially owned by another company, referred to as the parent or holding company. A parent company holding at least 51% of shares also demonstrates a controlling interest in the subsidiary. The advantages and disadvantages of a subsidiary will provide you with a better understanding of it.
Advantages of Subsidiary Company
- It offers tax advantages and legal protections.
- Subsidiaries can enable the parent company to manage its losses and gains in one part of the business with the other part.
- The credit claims and liabilities of the subsidiary are locked which means they cannot be transferred to the parent company.
- Setting up a subsidiary company can be a good option for corporations to expand their business into other regions and countries.
- It enables the parent company to achieve significantly better efficiency by bifurcating the large company into smaller parts which would be easy to operate and manage.
Disadvantages of Subsidiary Company
- Setting up a subsidiary company involves lengthy and thus, expensive formalities and legalities.
- There may arise conflicts at a certain point in terms of controlling the company as it has various stakeholders.
- The shared ownership control can make decision-making in a subsidiary time-consuming and thus challenging.
What is a Wholly-owned subsidiary?
A wholly-owned subsidiary company is a type of company whose 100% of common stocks are 100% owned by another company, called a Parent company or holding company. As a result, the parent company has complete control of overall management including operational and strategic management of the wholly-owned company. However, it allows some independence of operations as it is located in a different country due to which its way of operational execution may have a slight variation from the holding company.
Advantages of Wholly Owned Subsidiary
- It offers protection for trade confidentiality or secrets, information related to proprietorship, technical information, expertise, etc.
- It is relatively affordable for foreign organizations to take their business beyond their country’s boundaries to foray into a whole new market to access a large customer base.
- It helps share risks as well as expenses which is beneficial for the parent entity to enter the global market.
- It allows the parent organization to take full control of the operations taking place in its wholly-owned subsidiary in the foreign nation.
- The parent organization doesn’t have any obligation to share its secret technology and techniques with others outside the organization as they have 100% decision-making rights in a wholly-owned subsidiary company. As a result, the chances of loss of sensitive information of the parent company are minimal.
Disadvantages of wholly owned subsidiaries
The disadvantages of a wholly-owned subsidiary are as follows:
- The parent company often has to adhere to more tax regulations levied on its subsidiaries.
- Due to involvement in each aspect of a wholly-owned business, the parent company may face time scarcity to focus on itself which may eventually lead to missing project deadlines, and derailed business.
- Conflicts may arise between the parent and the subsidiary company. Such conflicts will affect the management eventually and may hamper the productivity of both the entities.
- Setting up a wholly-owned subsidiary may cause your cost structure to shoot up, as it involves various formalities.
- In case, a wholly owned subsidiary is not capable of functioning well, it will also affect the business flow of the parent company as well.
- Due to the need to share secret business techniques with wholly-owned subsidiaries, the risk of revealing secrets is involved.
Differences between Subsidiary and Wholly-Owned Subsidiary
The key differences between Subsidiary and a Wholly Owned Subsidiary are described as below;
1. Ownership and Control
Though both subsidiaries and wholly-owned subsidiaries operate as a distinct legal identity of the parent company, the primary difference between subsidiary and wholly owned subsidiary lies in their ownership. In a subsidiary, the parent company holds a majority stake and also has other stakeholders, thus the parent company may share ownership and control with other investors.
On the contrary, a wholly-owned subsidiary is 100% owned by the parent company, therefore the parent company has full control over the strategic decisions and operations of this form of subsidiary.
2. Liability and Risk Management
The Wholly Owned Subsidiaries provide better protection against liability risks. Any legal or financial obligations incurred by the wholly-owned subsidiary do not extend to the parent company. Such legal separation may also exist in a subsidiary, the sharing of control between all invested parties can lead to conflicts.
3. Decision-Making Autonomy
In a wholly-owned subsidiary, the parent company has complete control over the decision-making process. Right from a selection of key personnel to make any strategic move, the parent company holds autonomy in shaping the direction of its overseas operations, while a subsidiary is more responsible for making and implementing its strategic decisions.
4. Operational Flexibility
Joint ventures or partnerships often need consensus from their stakeholders to make any significant decision or implementation of any new strategy in the subsidiary, whereas wholly-owned subsidiaries offer higher flexibility in operational management. This virtue of a wholly-owned company enables the parent company to swiftly adapt to changing market scenarios, explore new opportunities, and optimize operational efficiency without the limitations of shared ownership.
5. Brand Consistency
Maintaining brand consistency and image in the global market is highly essential for many MNCs or global corporations. By setting up a wholly-owned subsidiary, the parent company can enforce uniform standards and brand guidelines, while it may not be possible with a subsidiary.
6. Intellectual Property Protection
Protection of Intellectual Property (IP) is vital for companies engaged in competitive industries. The wholly-owned subsidiary allows its parent company to have full control over its technical aspect, patents, and trademarks, therefore it minimizes the risk of IP infringement or unauthorized use by third parties.
7. Tax Efficiency & Transfer Pricing
When it comes to tax obligations, setting up wholly-owned subsidiaries can provide higher flexibility in managing transfer pricing and optimizing tax efficiency in comparison to a traditional subsidiary. By maintaining the flow of goods/services, and intellectual property between entities, companies can strategically distribute profits and losses in order to minimize tax liabilities depending upon the local regulations and international tax treaties.
There may be a few more differences between subsidiaries and wholly owned subsidiaries. More research on subsidiary vs wholly owned subsidiary would be done before setting up any of these subsidiaries!
Conclusion
The blog helps you develop insight into the fundamentals of subsidiaries, including their advantages and disadvantages. Moreover, it also elucidates key differences between a wholly owned subsidiary and a subsidiary. Delving into subsidiary vs. wholly owned subsidiary mainly their differences can help entrepreneurs make informed decisions!
