SUBSIDIARY COMPANY: CHARACTERISTICS, ADVANTAGES, DISADVANTAGES, EXAMPLES - DUDAS - 2025

A subsidiary company is a company that is owned and controlled by another. The owner company is called the parent company. The parent has a controlling interest in the subsidiary company, which means that it owns or controls more than half of its shares.

The parent company of a subsidiary may be the sole owner or one of several owners. If a parent company or holding company owns 100% of another company, that company is called a wholly owned subsidiary.

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A parent company is simply a company that runs a business and owns another business - the subsidiary. The parent company has its own operations and the subsidiary may carry on related business.

For example, the subsidiary could own and manage assets that are owned by the parent company, to maintain separate liability for those assets.

On the other hand, a corporation is owned by shareholders. In this case, the parent company must own 50% or more of the shares of the subsidiary. Otherwise, instead of a subsidiary company we would speak of a subsidiary.

characteristics

Operation

A subsidiary operates as a normal company would, while the parent company only has oversight over it.

If a subsidiary is located in a foreign country, it must comply with the laws of the country where it is operating.

Accounting and taxes

A subsidiary is a separate company, so you must maintain your own financial records, bank accounts, assets, and liabilities. Any transaction between the parent company and the subsidiary must be recorded.

From a tax point of view, a subsidiary is a separate tax entity. Each subsidiary has its own tax identification number and pays all its own taxes, according to its type of business.

Subsidiary vs branch

A subsidiary is a separate company, while a branch or division is part of the company.

A branch is a separate location within the company, such as the Pittsburgh branch of a company, whose headquarters are in New York.

A division is generally a group of locations with a common product or service. For example, a company may have multiple geographic divisions for sales purposes.

Subsidiary vs. subsidiary

A subsidiary is a company where at least half is owned by the parent company.

In the case of a subsidiary company, the parent company owns less than the controlling stake.

Advantage

Fiscal benefits

A parent company can substantially reduce its tax liability through state allowable deductions.

Subsidiaries can only be taxed in their own state or country, rather than having to pay all the profits from the parent.

For parent companies with multiple subsidiaries, the liability for profits made by one subsidiary company may be offset by losses in another.

Risk reduction

The parent-subsidiary framework reduces risk, because it creates a separation of legal entities. Losses incurred by a subsidiary are not easily transferred to the parent.

However, in the event of bankruptcy, the obligations of the subsidiary can be assigned to the parent if it can be proven that the parent and the subsidiary are legally one and the same.

For this reason, entertainment companies establish each of their individual movies or television shows as separate subsidiaries.

Greater efficiency

The creation of subsidiary companies allows the parent company to achieve greater operational efficiency by dividing a large company into smaller, easier-to-manage companies.

Experimental basis

Subsidiaries can be experimental bases for different organizational structures, manufacturing techniques, and types of products.

For example, companies in the fashion industry have a variety of brands or labels, each established as a subsidiary.

Disadvantages

Limited control

A parent company may have management control problems with its subsidiary if the subsidiary is partly owned by other entities.

Decision-making can also become somewhat tedious, as problems must be resolved through the chain of command within the main bureaucracy, before action can be taken.

Since subsidiaries must remain independent to some extent, transactions with the parent may have to be available, and the parent may not have as much control as it would like.

Legal costs

The long and expensive legal procedures result both from the formation of a subsidiary company, and from the double tax return that must be carried out.

Legal responsability

If the parent company is sued, legal responsibility can shift to the subsidiaries. Subsidiaries' assets could be at risk.

The parent may also be liable for criminal actions or corporate misappropriation by the subsidiary. You may have to guarantee the subsidiary's loans, leaving it exposed to financial losses.

Complications

Adding and consolidating the finances of a subsidiary obviously makes accounting for a parent more complicated and complex. It is more difficult to do from a tax, legal and accounting point of view.

Real examples

Amazon

The e-commerce company Amazon owns many subsidiary companies, ranging from Audible, an audio book company, to Zappo, dedicated to selling shoes online.

Facebook case

A very popular parent company in the digital industry is Facebook. In addition to being publicly traded on the open market, it also has several investment portfolios in other companies within the social media industry. It is the parent company of several software technology subsidiaries:

Instagram, LLC

A photo-sharing site, acquired by Facebook in April 2012 for approximately $ 1 billion in cash and shares.

Instagram remains separate in its operational management, being led by Kevin Systrom as CEO.

WhatsApp Inc.

Facebook acquired this popular messaging app for approximately $ 19.3 billion in 2014.

Oculus VR, LLC

In March 2014, Facebook agreed to buy $ 2 billion worth of stock in virtual reality company Oculus.

Ford case

The ownership structure of the small British company Ford Component Sales, which sells Ford components to automakers such as Morgan Motor Company and Caterham Cars, illustrates how multiple levels of subsidiaries are used in large corporations:

- Ford Motor Company: US parent company, based in Michigan.

- Ford International Capital LLC: top-tier subsidiary. US holding company located in Michigan, but registered in Delaware.

- Ford Technologies Limited: second tier subsidiary. British holding company, located at Ford UK head office in Brentwood, with five employees.

- Ford Motor Company Limited: third tier subsidiary. Ford's main British company, headquartered in Brentwood, with 10,500 employees.

References

1. Jean Murray (2019). What Is a Subsidiary Company. The Balance Small Business. Taken from: thebalancesmb.com.
2. Wikipedia, the free encyclopedia (2019). Subsidiary. Taken from: en.wikipedia.org.
3. James Chen (2019). Subsidiary. Investopedia. Taken from: investopedia.com.
4. CFI (2019). Subsidiary. Taken from: corporatefinanceinstitute.com.
5. Christina Hamlett (2019). The Definition of a Subsidiary Company. Small Business - Chron. Taken from: smallbusiness.chron.com.