When a single holding company completely owns a business and that business operates with or without direction from the controlling entity; this is known as wholly owned subsidiaries. The controlling entity is typically categorized as the parent company of the business.

There are several reasons why a wholly owned subsidiary is formed. For instance, corporations operating in more than one country may choose to form the subsidiary for tax benefits or the country they are based in may require local subsidiaries be established to conduct business there.

Another reason to form a wholly owned subsidiary is to reduce the liability of obtaining a new or risky business. The parent company is essentially responsible for securing financial obligations of their subsidiary but forming it as a wholly owned subsidiary reduces the risk and separates the financial responsibility of each entity.

Forming a wholly owned subsidiary is different form a merger and even consolidation. A merger is the combining two companies where one is completely absorbed and individual identity of one is lost. The parent company in this case assumes all rights, legal responsibility and liabilities of the absorbed business. Their identity is known only as the parent company’s identity.

A consolidation is different from a merger or forming a wholly owned subsidiary because in the case of consolidation, both companies lose their individual identity and become one company.

While there are obvious advantages to forming a wholly owned subsidiary, such as the financial and technological aspects; there are also disadvantages. One disadvantage to consider in forming a wholly owned subsidiary is the possibility of multiple taxation to the entities under the parent company umbrella. Another risk to consider is the financial responsibility the parent company takes on when obtaining the subsidiary.

One other disadvantage to forming a wholly owned subsidiary would be that the parent company is completely reliant upon the subsidiary’s performance in business processes especially if they are located in another country. The subsidiary would be responsible for hiring workers, recruiting sales representatives and basic day-to-day operations. If the parent company is located in a different area or country then they are dependent upon the subsidiary to conduct business.

The overall advantage for both parties however, in forming a wholly owned subsidiary; are that the subsidiary is allowed to retain its name brand while the parent company is afforded the opportunity to branch out into new markets.

Weigh all the pros and cons of forming a wholly owned subsidiary to see if it would benefit your corporation.