What is a partially owned subsidiary?

Within the corporate sphere, any company that is owned partially or entirely by a bigger, outside company is known as a subsidiary. Outside ownership of one company by another is typically determined by the percentage of Company A’s shares owned by Company B. If Company B owns less than 50% of Company A’s shares, that is typically referred to as an equity investment. Company B has some say in Company A’s operations, policies, and business practices, but Company B does not exert control over Company A.

However, if Company B owns 51% or more of Company A, then it has a controlling interest in Company A. In this case, Company B can dictate the operations of its subsidiary. Other shareholders still retain some input in the business’s operations, but the controlling company ultimately has the final say.

When one company owns more than 50% but less than 100% of a subsidiary company, the owned company is called a partially owned subsidiary. 

What is a parent company?

A parent company, also sometimes referred to as a holding company, is any company that owns a controlling interest in a second, distinct company. When the controlling interest represents more than 50% but less than 100% of the subsidiary’s shares, the subsidiary is known as a partially owned subsidiary. When the controlling interest represents 100% of the subsidiary’s shares, the second company is called a wholly owned subsidiary.

Can a parent company have multiple subsidiaries?

A holding company is generally allowed to own controlling interests in as many businesses as it wants, so long as it can afford to purchase enough shares. When a holding company owns two or more subsidiaries, the subsidiaries are known as “sister companies.” A parent company may also refer to its subsidiaries as “daughter companies.”

Is a partially owned subsidiary its own company?

A partially owned subsidiary is considered its own distinct legal entity. It will have its own operations, its own structure, and its own board of directors. A parent company may exert significant or total control over a subsidiary, but each has its own liabilities, tax requirements, and leadership. In a partially owned subsidiary, the business is typically more self-contained and reports to its own management before reporting to the parent company.

Who does the accounting for a partially owned subsidiary?

Although a parent company may own multiple smaller companies, each partially owned subsidiary is a whole, distinct business of its own. That means that all the subsidiary’s accounting, from payroll to revenue reports, can be done by the subsidiary itself. 

However, some companies may conduct their internal financial reports by consolidating numbers between parent and subsidiary. The consolidation of a partially owned subsidiary is quite common, and it involves combining all relevant financial data between parent and subsidiary when calculating the parent company’s finances.

How do international subsidiaries work?

When a parent company has subsidiaries that are incorporated in another country, things can get a bit complicated. Generally, a subsidiary is required to conform to all the laws and regulations of the country where it’s incorporated and where it operates. This can mean that policies have to be adapted between the parent company and subsidiary to ensure compliance in all relevant countries.

What are the benefits of partially owned subsidiaries?

A company may want to acquire a partially owned subsidiary for many reasons, as there are numerous benefits to owning a daughter company. One of the primary benefits of a partially owned subsidiary comes down to taxes. In many countries, parent and subsidiary companies can consolidate their financials, often leading to better tax rates for the parent company. There may even be additional tax benefits simply for owning a subsidiary. In some cases, gains made via one subsidiary can be negated by losses from a second subsidiary, minimizing the amount of income that is taxed.

A holding company may also benefit from a subsidiary by compartmentalizing liability. If a business plans to undertake a risky venture for which it may be held liable in the event of failure, it can be beneficial to use a subsidiary to take the risk instead. This offers the parent company some level of protection from liability.

Owning a subsidiary may also benefit a company when they want to maintain different types of company culture for their different ventures. Distinct structures and company cultures may benefit certain markets or types of work, while they could be less successful in the parent company’s main market. 

Partially owned subsidiaries are also commonly used to help a parent company break into a new market. Buying a controlling interest in a company in a new market is often less expensive than setting up a new entity, hiring talent with experience in the industry, and starting an operation from the ground up.

Are there any downsides to partially owned subsidiaries?

The main problem with a partially owned subsidiary is that the parent company can’t always retain full control, even with a controlling interest. Partially owned subsidiaries may have control over funds, assets, and management without needing a green light from the parent company. Likewise, other shareholders may influence decisions in a way that isn’t agreeable to the parent company.

On the other hand, decisions that need approval by the parent company need to work their way through two different chains of command, which can slow down the decision-making process at the daughter company.

It should also be noted that owning a subsidiary means a significant increase in the parent company’s legal costs. Taxes become more complicated the more companies are involved, and additional paperwork will certainly need to be filed. 

Disclaimer: This blog and all information in it is provided for general informational purposes only. It does not, and is not intended to, constitute legal or tax advice. You should consult with a qualified legal or tax professional for advice regarding any legal or tax matter and prior to acting (or refraining from acting) on the basis of any information provided on this website.