Joint Ventures and Wholly Owned Subsidiaries

What are Joint Ventures and Wholly Owned Subsidiaries?

The JVs (Joint Venture) are generally characterized by shared ownership, returns and risks, and also shared governance. 

 

Next, a Wholly owned subsidiary is a company whose entire stock is held by another a parent company. The subsidiary generally operates independently of its parent company, the subsidiary has its own senior management structure, organization layout and clients, this is not an integrated division or unit of the parent company.

 

The parent company on acquiring all the shares of a wholly owned subsidiary, there are no minority shareholders. The subsidiary with the permission of the parent company operates in their own division, this act makes them an unconsolidated subsidiary.

 

Wholly Owned Subsidiary 

A company whose 100% of the common stock is owned by the parent company is called a wholly owned subsidiary. A company is liable to be a wholly owned subsidiary through an acquisition by a parent company, apart from this a regular subsidiary company is only 51-99% owned by the parent company.

 

Wholly Owned Subsidiary Example 

A wholly owned subsidiary may be in a different country than the parent company. The subsidiary has its own management structure and clients. Owning a wholly owned subsidiary might help the parent company maintain its operations in wide geographic areas and markets or a different separate industry.

 

Volkswagen AG, owns other distinguished brands that are Audi, Bentley, Bugatti, Lamborghini that are wholly owned by Volkswagen AG. 

 

Another example is Marvel Entertainment Company is the wholly owned subsidiary of The Walt Disney.

 

Joint Venture Subsidiary

A joint venture (JV) is a type of business arrangement where two or more parties come to an agreement and pool their resources for the purpose of achieving a specific task. This task can be a new project or for any other business activity.


In a joint venture (JV), the participants together are responsible for their own profits, losses and the costs incurred and are associated with them.  


In a JV business, there is a partnership in common sense but even in legal structure they are business partners. JVs are used as a common purpose to partner up with a local business and then to enter a foreign market.

 

Wholly Owned Subsidiary Advantages & Disadvantages 

 

Advantages

The advantages of a wholly owned subsidiary are hereunder:

  1. Companies that will take control over the suppliers will benefit from the wholly owned subsidiaries.

  2. They can form a vertical integration where the companies are under the same owner.

  3. Wholly own subsidiary companies give space for the parent company to breathe and diversify, meaning they can fully grow and manage risk.

  4. A company can avoid competition while entering a new market by combining with its subsidiary. 

  5. For doing business abroad, the wholly owned subsidiary can be utilized for this purpose as well.

 

Disadvantages

The disadvantages of a wholly owned subsidiary are as follows: 

  1. The parent company faces more taxes which is levied on these subsidiaries.

  2. Doing diversification with the wholly owned business may hamper focus on itself.

  3. There may be a conflict between the parent and the subsidiary company that will affect the management of both the companies.

  4. Cost structure will shoot up, various other formalities need to be done with the wholly owned subsidiary.

  5. If the wholly owned subsidiary proves inadequate to function, then it will disturb the flow of business of the parent company as well.

FAQs (Frequently Asked Questions)

1.What are the Reasons for a Company to Form a JV?

Answer:

The three big reasons for a company to form a JV are:

  • Leverage Resources – The company can use the combined resources of both the companies to enjoy the benefit of large scale of production with limited resources.

  • Cost Savings – Economies of scale helps both the company and they can benefit from a lower per-unit cost.

  • Combined Expertise – With the business being owned by the same head they will achieve combined expertise in the management level.

2. Who is a Parent Company?

Answer: A parent company is a company that is owned by enough voting stock in another firm (known as the subsidiary unit). The parent company controls management and operation by influencing and electing the board of directors of the subsidiary company. Companies that operate under this management, and their influence is dominated on other companies are deemed subsidiaries of the parent company.

3. What are Unconsolidated Subsidiaries?

Answer: Unconsolidated subsidiaries are those companies who are owned by a parent company by owning their voted stake but who have individual financial statements, that are not included in the consolidated or combined financial statements with the parent company. This company may be a wholly-owned subsidiary.

4. What is a Vertical Integration?

Answer: A Vertical integration is a type of strategy where a company owns or controls its suppliers, distributors or retail locations for its value or supply chain. Vertical integration benefits companies by allowing them in the process of control to reduce costs and improve its efficiencies.