subsidiary company

In the corporate world, a subsidiary is a company that belongs to another company, which is usually referred to as the parent company or holding company. The parent holds a controlling interest in the subsidiary company, meaning it owns or controls more than half of its stock. In cases where a subsidiary is 100% owned by another company, the subsidiary is referred to as a wholly owned subsidiary.

What Is a Subsidiary?

A subsidiary, in the business world, is a corporation that belongs to another corporation, generally referred to as the parent or holding company.

The parent has a controlling interest in the company, meaning it has more than half of its stock or manages it. The subsidiary is referred to as a completely owned subsidiary in situations where a subsidiary is owned 100% by another company. When considering a reverse triangle mortgage, subsidiaries get very relevant.

A subsidiary is a smaller business that belongs to a parent or holding company. The parent retains majority control over the subsidiary, owning over half of its stock. Any less than that and it is considered an “associate” or “affiliate” company. An associate company is treated differently than a subsidiary in financial reporting. A subsidiary creates its financial reports separate from its company’s statements.A parent or holding company could own one or many subsidiaries. Each subsidiary follows the rules and regulations of the state in which the parent company operates. Sometimes, a parent has full control over its subsidiary company. When this occurs, the child company is referred to as a “wholly-owned subsidiary.”

What does a subsidiary do?

Subsidiaries exist to supplement the parent with additional bonuses such as increased tax benefits, earnings and property. Although the parent keeps majority ownership, the subsidiary remains as a separate, legal entity which shows in its liabilities and taxation.In some cases, subsidiaries are formed for a particular purpose. For example, in the real estate industry, companies may have several properties that form the overall holding company. The individual properties are subsidiaries. Creating subsidiaries can help protect assets from each other’s liabilities. So, for example, if a lawsuit threatens one of the properties, the others will not be affected.Subsidiaries usually manage their day-to-day functions but often need to seek approval from their parent company before making bigger decisions. If a parent company were to assume the daily responsibilities of a subsidiary, then it would also need to accept liability for the subsidiary.

Why do companies create subsidiaries?

1. To raise money- By owning a subsidiary, a parent company can offer stock and drive investments for their company for just the subsidiary portion of their company. In this way, they can raise capital without incurring the risk of altering their main company’s stock value.

2. To save on taxes- Parent companies that own at least 80% of one or more subsidiaries can file a consolidated tax return while writing off any losses the subsidiary might incur from their total income. By separating the businesses, companies can manage and sell their subsidiaries without affecting their parent operation. They are also only accountable for subsidiary debt collection on the subsidiary accounts.

3. To report and disclose strategically- When a parent company’s assets are separated from that of its subsidiaries, it can choose which aspects of the business should be public or remain private. This can be especially helpful if the parent company is in a competitive industry and not ready to introduce a new product line.

4. To streamline brand approach- A parent company might have multiple product lines and brand identities that serve them. By having separate subsidiaries, it’s easy to differentiate brand identities and company culture into an organized structure, which, in turn, streamlines vendor relations, marketing and customer brand recognition.

Subsidiary Financials

A subsidiary usually prepares independent financial statements. Typically, these are sent to the parent, which will aggregate them—as it does financials from all of its operations—and carry them on its consolidated financial statements. In contrast, an associate company’s financials are not combined with the parent’s. Instead, the parent registers the value of its stake in the associate as an asset on its balance sheet.

Pros and cons of subsidiaries

Advantages

Potential benefits of owning a subsidiary include:

Tax advantages: Subsidiaries may only be subject to taxes within their state or country instead of having to pay for all of their profits.
Loss management: Subsidiaries can be used as a liability shield against losses. For example, companies in the entertainment industry often set up individual films or shows as separate subsidiaries. Any losses that occur within those properties are contained within them.
Easy to establish: Small firms are easy to establish. As with the entertainment and real estate industry examples above, companies can set up assets to be their own subsidiary, if needed.
Synergize with other subsidiaries: Large parent companies often have a network of subsidiaries. They can work together to help each other with various processes, streamlining efficiency across all child companies.

Disadvantages

Potential disadvantages of owning a subsidiary are:

More legalities: Owning multiple firms and their assets can cause legal concerns. Laws differ between states and countries. If the subsidiaries either work in or throughout these various areas, they will need to follow their laws and regulations.
Complex financials: Accounting becomes more difficult when organizing and consolidating a subsidiary’s financials. This is especially true when a parent company owns multiple subsidiaries.
Increased liability: Since the parent company owns a majority of the subsidiary, it’s liable for all of the actions of the subsidiary

FAQs

Is a Subsidiary Its Own Company?

Yes. A subsidiary is independent, operating as a separate and distinct entity from its parent company. That said, the parent company, as a majority owner, can influence how its subsidiary is run and may be liable, for example, for the subsidiary’s negligence and debt

Does a Subsidiary Have Its Own CEO?

As a subsidiary functions as a separate entity, it usually has its own management team and CEO. However, the parent company will get a significant say in who runs the company and who sits on its board of directors.

What Are Sister Companies?

Two or more subsidiaries majority owned by the same parent company are called sister companies.

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