A wholly owned subsidiary is an entity whose stock is entirely owned by another entity. The owning entity is called the parent. A subsidiary may become wholly owned as the result of an acquisition, or because the parent spun off certain assets and liabilities into a separate entity. There are a number of reasons why a parent company would want to have a wholly owned subsidiary, including the following:
- To maintain valuable contracts with customers that would otherwise terminate if the subsidiary were to be liquidated.
- To manage operations in a foreign country.
- To separate a certain risk profile from the assets of the parent entity.
- To recognize or offload taxable income, depending on the tax rates where the subsidiary is located.
- To separate the operations of the subsidiary from those of the rest of the company.
A parent entity may have a large number of wholly owned subsidiaries, depending upon the extent to which it is managing its operations based on the preceding factors.
When a subsidiary is not wholly owned, third parties also have an ownership interest in the subsidiary. This situation may arise when it was not possible for the owning entity to purchase all existing shares in the subsidiary, or when the owning entity chooses to limit the total amount of its investment in the subsidiary.