What is a Wholly-Owned Subsidiary?

When a subsidiary is considered to be wholly owned, this indicates that all of the outstanding common stock that is currently issued by the company is in the hands of a single holding company. Essentially, a wholly-owned subsidiary is a business that is completely owned by another entity. The subsidiary continues to operate with the permission of the holding company, either with or without direct input from the controlling entity.

There are several reasons why a company would choose to operate a wholly owned subsidiary rather than simply absorb the acquired company into the central corporate operation. One of the most common reasons is a matter of location: the subsidiary may physically reside in a different country from the holding company. When this is the case, there may be compelling financial and regulatory factors that make it much more financially sound to allow the company to continue more or less autonomously.

Name value is another common reason. Often, a well-known and respected corporation is acquired by another entity that has no name recognition in that particular market. Rather than spend huge amounts of time and resources to create a reputation, the holding company will simply decide to remain in the background. This allows the wholly-owned subsidiary to continue to enjoy the current name recognition and market share, while being able to work with the resources of the parent company to find ways to enhance that reputation.

In some instances, the subsidiary will be an investment into one market sector by a company that is more closely associated with a completely different industry. This allows the parent company to diversity its holdings and therefore become less susceptible to abrupt changes in consumer tastes and demand. It is not uncommon for a wholly-owned subsidiary to provide a steady flow of revenue during a period of financial decline for the parent company, keeping both entities afloat until the holding company regains profitability.