Subsidiary Companies [Examples, Pros & Cons]

Many large and successful corporations own a number of smaller companies – these corporations are referred to as parent or holding companies. The company that is owned by one of these large corporations, on the other hand, is known as a subsidiary company. If you’re looking to learn what is a subsidiary company, how they work, and what are their main advantages and disadvantages, this is the article for you!

What Is a Subsidiary Company?

A subsidiary is a smaller company that is either partially owned or completely owned by another, larger company. The bigger company involved is the parent company, or otherwise known as the holding company. Parent companies hold the majority of control over a subsidiary since they own more than half of the subsidiary’s stock. If a company owns less than half of another’s stock, it ceases to be the parent company; It is instead referred to as an associate or affiliate company.

Parent and holding companies can own more than one subsidiary; In many cases, large corporations have a great number of subsidiaries, and every one of them has to comply with the laws of where the parent company operates. The meaning of subsidiary can be explained by comparing the relationship between the subsidiary and its owner with that of a child and parent – subsidiaries are also known as ‘child companies’. Already existing companies can create new businesses registered as independent subsidiaries whenever they want to, as long as they have management approval. Even though the parent, as a majority stockholder, controls the subsidiary’s operations and assets, the subsidiary is still a separate legal entity and retains some rights, as well as a certain degree of liability.

If the child company is owned and controlled entirely by the parent, they are known as a wholly-owned subsidiary. This type of company has no other shareholders besides the parent corporation, which has complete control over the major decisions and who sits on the board of directors. This, by default, controls who has voting rights in the company.

Wholly Owned Subsidiary Advantages and Disadvantages

Like other types of companies, wholly-owned subsidiaries have pros and cons. Some of the positive aspects of this type of company are diversified risk, vertical integration of supply chains, and favorable tax treatment, especially abroad. The drawbacks, on the other hand, include: conflict of interest between parent and subsidiary, decreased business focus, and the possibility of multiple taxations.

How Do Subsidiary Companies Work?

A subsidiary provides additional assets – earnings, property, and tax benefits – for its parent. Subsidiaries also serve as a liability shield for its parent; If an asset or property is threatened by a lawsuit, the other possessions of the parent or holding company will not be affected.

An independent subsidiary manages its own day-to-day operations, but they need to get approval from their parent before settling on any bigger decisions. However, if the parent wants to take control over all the operations of the subsidiary, it can automatically accept all liability for the subsidiary. If a subsidiary is wholly-owned, it can be located in another country, providing the parent with access to various markets and new business sectors. The subsidiary also offers its own products and/or services, attracting new, different types of customers, which is another plus for the parent.

Some corporations decide to take a step further and expand to foreign territories – the foreign subsidiary definition states that a company operating in another country, while being part of a larger corporation with a headquarters located elsewhere, is regarded as a foreign subsidiary. These companies can be established by the acquisition of or merger with an already existing company within the country, or they could be set up from scratch.

The subsidiary company definition says that a subsidiary is formed by registering a company with the state where the operations of the company are taking place. The registration form of the company has to clearly state the ownership of the company and the type of business entity, such as a limited liability company (LLC). LLCs are a common choice among corporations founding subsidiaries – anyone can form an LLC by using a professional LLC service, or they can learn how to start LLCs themselves.

Subsidiary vs Affiliate

In cases where a company’s percentage of shares in another company is 50% or less, the parent corporation does not control the company it owns, and the owned company is known as an ‘associate’, ‘affiliated company,’ or simply an ‘affiliate’. Essentially, the main difference between a company affiliate and a company subsidiary is the percentage of ownership a business has in its other, smaller companies. Corporations have only a minority share of stocks in their affiliates, which also protects them from any negative publicity.

The term ‘affiliate’ is at times used to refer to companies that are in some way related to each other; This can bring them some tax benefits, or easier access to new markets.

Division vs Subsidiary

A division, or branch, is part of a company that deals with a specific activity or service, while the subsidiary is a separate company. It is very important to make a distinction between a subsidiary company structure and the structure of a division: even if the division operates under its own name like it’s an independent company, it is still a direct part of the company that owns it, while the subsidiary stands independently from its parent.

In addition to this, a division doesn’t have the same liability protection as a subsidiary – all profits, debts, and other liabilities are accrued to the owning company, and this company has full and absolute control over the division. Another important difference is that a subsidiary can have a completely different function to that of the corporate entity that owns it, while the division works on something that is somehow related to the operations of the company that it is a part of.

Key Takeaways

Advantages and Disadvantages of a Subsidiary

Subsidiary companies are often considered a smart investment for large corporations – but like everything else in the corporate world, not everything about subsidiaries is good. The features of a subsidiary company are divided into positive and negative, advantageous and less advantageous;

Check out the list below to see what is what.

Advantages of a Subsidiary

• Taxation – Subsidiaries may be subjected only to taxes in their country or state of operation, instead of having to pay tax on all their profits. This is provided by the consolidated tax return, which has to be filed by the parent corporation.

• Simple formation process – Since subsidiaries are smaller in size, they are easier to form and get off the ground and running. They can also be registered as various types of business entities, so the owning company can choose the option that works best for them.

• Liability protection – The subsidiary business definition clearly states that parent companies are not accountable for any losses accrued by their subsidiaries. Any and all losses that occur within the subsidiary are contained to the company and do not affect the parent.

• Synergies with other subsidiary companies – Since owning companies usually have more than one subsidiary, all of these companies can work together and provide help to each other if necessary.

Disadvantages of a Subsidiary

• Legal concerns – The larger the number of subsidiaries, the more parent companies need to be wary of state and federal laws and ensure all of their child companies comply with the laws and regulations.

• Complicated finances – Although a subsidiary is an independent entity and provides independent financial statements, the holding company also must report any profits ( or losses) they’ve acquired through the subsidiary on consolidated financial statements, making accounting a difficult process.

Subsidiary Company Examples

Numerous famous and successful companies are either subsidiaries themselves, or own other companies as their subsidiaries. One of the most successful corporations, owning a large number of subsidiaries, is Alphabet Inc. Some of its most prominent subsidiaries are Google, Calico, Verily, Waymo, Wing, Firebase…and the list goes on! All of the subsidiaries owned by this distinct corporation add value to the company in some way – through earnings, revenue, diversification, or through research and development.

What Is a Subsidiary of a Company Like Alphabet?

An example of a small yet successful Alphabet subsidiary is Sidewalk – a startup that aims to modernize US public transport by predicting the concentration of commuters and traffic in larger urban areas. This startup is a useful tool for another one of Alphabet’s subsidiaries, Google Maps.

What Are Subsidiary Companies That Might Come as a Surprise?

Quite possibly the most popular parent company in the tech industry is Facebook, having investment portfolios in multiple social media companies and serving as a parent firm for several other tech sub-companies. Instagram, currently among the most popular social media platforms, was acquired by Facebook in 2012; Although its management is separate to this day, surprisingly, Facebook owns the company in its entirety. In 2014, Facebook acquired two other companies: the messaging app WhatsApp, and the virtual reality company Oculus, making Facebook a giant among subsidiary owners.

General Electric owns around 100 subsidiaries, the most prominent being Universal Studios and NBC. If you’re looking for a wholly-owned subsidiary example, look no further than Disney Channel, which is wholly owned by The Walt Disney Company.

Conclusion

Many large businesses purchase or establish subsidiaries in order to expand their operations at minimal risk and balance the firm’s equity. The parent company and subsidiary exist independently of each other while enjoying some mutually exclusive benefits – the parent claims additional earnings and property, and other benefits, while the subsidiary enjoys the benefits brought on by the parent’s reputation and has at its disposal some of its resources.