Overview: Subsidiary Company
A subsidiary company is a type of firm/company that is managed completely by another enterprise. The organization is known as the parent or the holding company. In terms of taxation, regulation, and liability, this is favorable to the corporation.
The minimal level of ownership of 51% ensures that the parent company has the majority of the votes to form the subsidiary’s board of directors. This permits the parent to have a say in company decisions. As the largest shareholder, the parent company can appoint the board of directors and manage the overall corporate plan.
You’ve come across subsidiary corporations in your line of work. A few of the largest and most successful companies come within this category. For example, PepsiCo subsidiaries include Quaker Oats, Naked Juice, and Walkers. All 3 firms have quite a distinct branding, but they are all part of the same group of subsidiary companies.
Purpose of a Subsidiary Company
The primary advantage of a subsidiary company stems from the fact that they are separate legal entities from their parent company. This means that the two companies can restrict their common duties or obligations and will be regulated and taxed separately. In effect, this limits the parent and subsidiary companies’ legal and financial exposure. Separating firms can serve to protect the holding company from potential financial or legal challenges that a subsidiary company may encounter.
Subsidiary companies are a popular means for employers to access export markets. The risk to the larger corporation is reduced since the companies are self-contained. Subsidiary firms are usually separate brands that function under the guide or instructions of the parent company.
Integrated brands can profit from the synergy between various components of a broader business company while yet maintaining their independence. Because financial obligations are controlled, innovative brands or commodities can be subsidiaries. Subsidiary firms are also easier to run and sell because they are different legal entities.
Difference Between Subsidiary & Holding Company
A holding company’s connection with its subsidiary company is similar to that of a parent and child.
A parent company owns or controls a subsidiary; however, that parent firm may or may not be a holding company.
Whereas a holding company is a parent company that owns or controls other companies. An owned subsidiary is one in which the parent firm owns 100% of the subsidiary.
The subsidiary is known as an affiliate or associate company if the parent firm does not have a controlling interest, defined as less than 51% voting interest.
Holding companies, often known as umbrella corporations, gather together a variety of subsidiary enterprises. Along with corporations, it may own a variety of assets such as shares or estate development.
In general, holding companies will be in charge of the business group’s strategic goals, as well as the selection of board members for the subsidiary firms. Corporations can use board portal software to keep track of governance decisions across the organization.
What exactly is a completely managed Subsidiary Company?
An owned subsidiary is one in which the parent corporation owns the whole subsidiary company. This signifies that the parent business owns all of the common shares.
This is typically accomplished by a parent firm obtaining complete control of a subsidiary company or by establishing the subsidiary company itself. The completely owned subsidiary company continues to be legally recognized as a separate business.
A multinational corporation’s wholly-owned subsidiary firms are frequently foreign activities. It also enables the parent firm to retain complete control over procedures and goods.
What does an Associate Company mean?
When a company owns a minority stake in another company, the company is referred to as an associate or connected company.
The parent corporation must possess the majority of a company for it to be labeled a subsidiary. If a parent business owns a minority percentage of common stock, it will not have any direct control over strategic decisions. In most circumstances, a larger corporation will invest in a smaller subsidiary. The investment value is recorded on the income statement of the parent company.
Advantages & Disadvantages of a Subsidiary Company:
Subsidiaries can help a parent business contain and limit difficulties. By using the subsidiary as a liability shield against financial losses or lawsuits, the parent company’s potential losses can be reduced. For this reason, entertainment companies frequently create separate subsidiaries for individual movies or TV shows.
Advantages of Subsidiary Company:
1. Enhanced efficiency and diversity
By dividing a large corporation into smaller companies, it is more easily manageable. This, in turn, helps the parent company to achieve improved operational efficiency.
2. Financial benefits
Deductions granted by the state can reduce significantly lower a parent company’s tax liability. When a parent company has numerous subsidiaries, the income liability from one sub’s gains is frequently offset by losses in another.
3. Lowering of risks
The parent-subsidiary arrangement helps in reducing risk as it helps in creating separate, distinct legal entities. Losses sustained by a subsidiary are difficult to transfer to the parent. The subsidiary’s debts may be assigned to the parent in the event of bankruptcy if proved that the parent and subsidiary are the same.
Disadvantages of Subsidiary Company:
Legal Bills: Both the formation of a subsidiary business and the filing of taxes result in lengthy and costly legal documentation burdens.
Control is limited: If a parent’s subsidiary is partially owned by another entity, the parent may have managerial control concerns with the subsidiary.
Examples of a Subsidiary Company:
Facebook is a well-known parent corporation in the internet economy. It is the parent company of sub-companies & software technologies, in addition to being openly listed on the open market.
Sub-companies that fall under Facebook are Instagram, Oculus VR, Whatsapp Inc.
What Factors Influence the Success of a Subsidiary Company?
The ones that keep their brand while leveraging the parent company’s resources Companies can use subsidiaries to grow into new areas and strengthen their corporate structure.
A successful subsidiary relies on effective communication. When everyone on the board of the subsidiary knows their relationship with the parent firm, they can move forward efficiently. Both the subsidiary and the parent corporation benefit from this. It may also aid in avoiding situations such as the Enviroco court case.
Balancing the conference and the operations of several companies can appear to be a difficult assignment. And here is where OnDemand International can help you to make your procedure of working smooth and easy. From automating payment collection to reducing the amount of admin your team has to deal with while pursuing bills, OnDemand International has got you covered.
Conclusion
Forming a subsidiary company is a strategic move that can offer numerous benefits, including market expansion, risk mitigation, and regulatory compliance. However, it also comes with challenges, such as increased complexity and costs. By understanding the intricacies of subsidiary companies and following a structured approach to their establishment, businesses can leverage this model to achieve their growth and diversification objectives.
Looking to register a company overseas? Speak with our company formation experts from OnDemand International.
FAQ’s
It is applied to the document to check its originality and authenticity so that it can be accepted in one of the other nations. The certificate can be used to authenticate public documents such as a driver’s license, documents of a company, notarial attestation.
A firm may not have more than two (2) layers of subsidiaries.
In the consolidated parent company’s home window, select the File menu, then Consolidated Company.
To add or eliminate subsidiary firms, use the Consolidation wizard. At least one subsidiary company must still exist.
Because the holding company has control over the operation of a subsidiary, they are not permitted to own shares in the holding company, as this could be abused by the holding company. This analysis will provide more details about this part.
It may be common for a parent corporation to provide an expense on behalf of its subsidiary company.