Expanding your business can be exhilarating, yet it comes with inherent risks. Each new branch introduces fresh legal and financial hurdles, potentially jeopardizing the entire company if the branch fails to generate profits or faces litigation.
To mitigate risks while expanding, corporate entities often establish subsidiaries. A subsidiary company is either wholly or partially owned by a larger organization, known as the parent company or the holding corporation. With a controlling interest in the subsidiary, the parent company can steer its operations, policies, and strategic decisions, while maintaining legal separation from the subsidiaries they control. There are several reasons why a company may opt to create subsidiaries.
In this article, we’ll delve into the concept of subsidiary company, explaining how to establish a subsidiary company, and explore the benefits, purposes, and drawbacks associated with this business structure.
What is a Subsidiary Company?
A subsidiary company is a seperate legal company which is owned, either fully or partially, by another larger company referred to as the parent company or the holding corporation. This relationship allows the parent company to exert control over the subsidiary’s operations, policies, and strategic decisions. However, despite this control, subsidiary companies maintain their own legal identity and are considered separate entities from their parent companies.
Subsidiary companies are commonly used for various purposes, including expanding into new markets, diversifying business activities, or reducing legal and financial risks associated with certain operations. By establishing subsidiaries, parent companies can allocate resources more effectively, manage risks, and take advantage of tax benefits or regulatory advantages in different jurisdictions.
Furthermore, subsidiary companies offer flexibility in management structures, allowing for specialized focus and tailored strategies to meet specific market demands or regulatory requirements. Overall, subsidiary companies serve as integral components of corporate structures, enabling businesses to grow, adapt, and navigate complex business environments while maintaining legal autonomy and operational independence.
What is a wholly owned subsidiary company?
A wholly owned subsidiary company is a business entity that is entirely owned by another larger company, known as the parent company or the holding corporation. In this arrangement, the parent company owns 100% of the subsidiary’s shares, giving it full control over the subsidiary’s operations, policies, and strategic decisions. Despite being under the direct ownership and control of the parent company, a wholly owned subsidiary operates as a separate legal entity, maintaining its own distinct identity. This structure allows the parent company to consolidate financial statements, exercise complete authority over the subsidiary’s activities, and potentially benefit from tax advantages or regulatory efficiencies associated with the subsidiary’s operations. Wholly owned subsidiaries are often established to expand into new markets, diversify business activities, or streamline operations within the corporate group. Example of a wholly owned subsidiary company: Walt Disney Entertainment holds 100% of Marvel Entertainment which produces movies.
- The purpose of making a wholly-owned subsidiary is to diversify the business operations of the company and create a separate channel to run it.
- Since it is a 100% holding, every one of the assets mixed in the subsidiary is of the parent organization and they are allowed to choose about the future possibilities also.
- As an wholly owned subsidiary company, the monetary after effects of the equivalent would be joined with the parent organization in the yearly report of the parent organization on the accounting report date.
How Subsidiary Company works?
A parent company purchases or builds up a subsidiary to give the parent explicit collaborations, for example, expanded tax cuts, enhanced danger, or resources such as profit, hardware, or property.
In any case, auxiliaries are isolated and particular lawful substances from their parent organizations, which reflects in the freedom of their liabilities, tax collection, and administration. In the event that a parent company possesses a subsidiary in an unfamiliar land, the subsidiary should adhere to the laws of the nation where it is consolidated and works.
Nonetheless, given their controlling interest parent organizations regularly have a significant impact on their auxiliaries. They—alongside other subsidiary investors, assuming any—vote to choose a subsidiary company’s directorate, and there may regularly be a board-part cross-over between a subsidiary and its parent company.
The acquisition of a premium in a subsidiary varies from a consolidation: The buy generally costs the parent enterprise a more modest venture, and investor endorsement isn’t needed to transform a company into a subsidiary as it would be in case of a consolidation. Nor is a vote needed to sell the subsidiary.
To be assigned a subsidiary, essentially half of an association’s value must be constrained by another element. On the off chance that the stake is not exactly that, the firm is viewed as a partner or associate company. With regards to monetary revealing, a partner is dealt with uniquely in contrast to a subsidiary.
Purpose of a Subsidiary Company
The principle advantage of subsidiary organizations draws from the way that they are distinctive legitimate elements to their parent company. This implies the two organizations can restrict shared liabilities or commitments and will be independent as far as guideline or expense. By and by, this restricts the legitimate and monetary obligation of both the parent and subsidiary company. Keeping organizations separate can assist with protecting the holding company from potential monetary or legitimate issues looked by a subsidiary company.
On account of global partnerships, subsidiary organizations will be lined up with nearby guidelines or laws. As a consolidated company by its own doing, a subsidiary company can exploit more positive corporate duty rates contrasted with where the parent company is based. Subsidiary organizations are a typical way for enterprises to venture into global business sectors. As autonomous elements, the danger for the more extensive partnership is limited.
Subsidiary organizations are regularly unmistakable brands, situated under a general holding company. These brands can profit from the collaboration between various pieces of the bigger corporate gathering, yet additionally hold the advantage of freedom. subsidiary can be test brands or items, as monetary liabilities are contained. As independent lawful substances, subsidiary organizations are more direct to oversee or sell as well.
Rather than putting vigorously in inward innovative work, parent organizations frequently secure organizations with explicit region aptitude. A model would be a bigger company buying a little firm that delivers a particular innovation or computerized instrument. Subsidiary organizations permit parent companies to broaden their business however seclude the potential dangers implied
How to Start a Subsidiary Company?
If a parent firm wishes to acquire an affiliate business then it can either purchase an existing company or establish the company. If the parent company decides to buy a business, it will have to purchase the majority of shares of the company.
If a parent company decides to form its own company the company must comply with the procedures to register a new company (which is different depending on the place of business). The parent company is also required to pay a variety of fees to create or register the business.
Here are the general steps you must take to form a subsidiary company:
Provide your consent
The current business must consent to the creation of a subsidiary. The board of directors or other management of the previous corporation often votes on this at a meeting. You must keep a record of this consent.
Pick a legal structure for your company
A corporation and LLC are often recommended for starting a subsidiary company. You must choose either of the two business structures based on your individual circumstances.
Organize a meeting with your board of directors
The kind of commercial structure you choose has to be mentioned in your meeting, and the resolution has to be approved by the chairman and kept on record.
Select a location
You must decide the location where you’ll establish your subsidiary and finish the required papers by that state.
Fulfill necessary requirements
You must first choose and establish an organization’s name, address, and registered agent who has the authority to receive correspondence on the firm’s behalf before you can complete the necessary paperwork.
Submit required documentation
Once all of this is done you can submit the paperwork to the authorities.
Benefits of a Subsidiary Company
There are numerous benefits of a subsidiary company such as:
Management of losses
The subsidiary will be accountable for its own loss. If a subsidiary becomes insolvent, for example, the creditors aren’t able to go after the parent company to recover the debt of the subsidiary.
Reduced liability
Subsidiaries shield their parent companies from lawsuits as well as financial responsibility. If a subsidiary is sued and is found to be liable, the parent company won’t be accountable for financial and legal costs.
Tax benefits
Because parent companies have the largest share of stock in subsidiaries, they must pay taxes on dividends their stocks earn. Companies with several subsidiaries are able to reduce dividends from one subsidiary with losses from another, thereby reducing their tax burden.
Risk reduction
Companies that have subsidiaries reduce their risk of bankruptcy. In the event that one of them becomes bankrupt, the parent company and all of its subsidiaries are generally not affected.
Improved efficiency
Splitting up different elements of a business into separate entities can help each subsidiary to manage. Each business has its own team of management.
Easy to buy or sell
In the event that a parent firm is looking to grow or diversify its operations by offering a brand-new product or service, it could buy a subsidiary that already provides the service. If the subsidiary is unsuccessful, the parent company can dispose of it without impacting its other assets.
The synergy between other subsidiaries of the corporate
A subsidiary arrangement gives parent companies the benefit of having separate businesses. But, they can be a part of and collaborate with other businesses under the same umbrella.
Disadvantages of Subsidiary Company
Here are the disadvantages of subsidiary companies:
Restricted authority
If a holding’s subsidiary is partially controlled by other companies, the holding may experience managerial control concerns with the subsidiary. Due to the fact that decisions must first be made through the parent bureaucracy’s administrative hierarchy before being implemented, making decisions may also grow laborious.
Legal expenses
The creation of a subsidiary business and the submission of taxes can result in time-consuming and expensive legal procedural responsibilities.
Difficult accounting
Accounting for a parent becomes more difficult and complicated when a subsidiary’s financial statements are combined and consolidated.
Conclusion
A subsidiary business can help you to expand your current business, while reducing the risk. However, a parent business is able to reap the benefits of the subsidiary (“child”) provided that the business entity that is created is properly set up.
However, forming a subsidiary firm will involve obtaining the appropriate permission to establish an affiliate from the existing business and ensuring that it meets the applicable requirements for business formation.
If you want to set up a subsidiary firm, then you must seek assistance from professional experts from OnDemand International. Odint experts have years of experience and can assist you with the steps to set up a subsidiary and to avoid any errors.
FAQ’s
A subsidiary company could be an LLC, corporation or a nonprofit. Examples of subsidiary companies are Instagram that is controlled by Facebook as well as YouTube that is controlled by Google.
Yes, subsidiaries firm are sometimes referred to as child companies, which are owned by parent companies or holding companies.
Subsidiaries may benefit from tax incentives particularly if the subsidiary is incorporated in the country or state of another. Subsidiaries can combine or sell divisions of their company more easily and less expensive than if it was an affiliate of a parent company.
Like any other company, an affiliate must have a registered address in the state or the country in which it’s situated.
There are three kinds of subsidiary companies: Wholly Owned Subsidiaries, Partly Owned Subsidiaries, and Joint Venture Subsidiaries.
